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United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Waterlow & Sons Ltd v Banco de Portugal [1932] UKHL 1 (28 April 1932)
URL: http://www.bailii.org/uk/cases/UKHL/1932/1.html
Cite as: [1932] AC 452, [1932] UKHL 1
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To carry out any Stock Exchange operations which
cannot be immediately liquidated even if for account of third
parties.To pay interest on any cash received in account
current payable at sight.To promote or take part in the creation of commercial
banking or other undertakings.Whether in the circumstances of this Case the Bank,
when they gave in exchange for a forged note of the face value
of 500 Escudos a good note of that face value, could properly
be said to have suffered a loss of 500 Escudos, with the result
that Water Iowa, who are liable by reason of a breach of con-
tract which enabled the forged notes to be put into circulation,
are bound to pay to the Bank 500 Escudos converted into
sterling at the rate current at the date of the loss.Whether the Bank gave evidence of, or proved, any
loss at all.Whether if the Bank proved any loss, such loss was
not caused in whole or in part by the voluntary action of the
Bank themselves or was not in whole or in part such a loss as
could not fairly and reasonably be considered as arising
naturally from the breach of contract or such a loss as could
not be reasonably supposed to have been in contemplation by
both parties at the time of making the contract as the probable
result of the breach, or whether the loss was not aggravated by
the failure of the Bank to take reasonable steps to limit the
loss.The loss, if any, suffered by the Bank was caused in
whole or in part by the voluntary action of the Bank and /or
was in whole or in part a loss which could not fairly and
reasonably be considered as arising naturally from Waterlow's
breach of contract and was a loss which could not reasonably be
supposed to have been in contemplation of both parties at the
time of the making of the contract as the probable result of the
breach.The loss suffered by the Bank, if any, was merely
nominal, being the present value of the liability at an undeter-
mined and undeterminable future date, to give gold or other
value for the good notes it issued in exchange for bad notes.
Die Jovis, 28° Aprilis, 1932.
Parliamentary
Archives,
HL/PO/JU/4/3/866
Lord
Chancellor.
Lord
Warring-
ton
of
Clyffe.
Lord
Atkin.
Lord
Russell of
Killowen.
Lord
Macmillan.
BANCO DE PORTUGAL
v.
WATERLOW & SONS, LTD.
WATERLOW & SONS, LTD.
v•
BANCO DE PORTUGAL
(Consolidated Appeals).
The Lord Chancellor.
These are the Appeals of the
Banco de Portugal, hereinafter
called " the Bank," and
of Waterlow & Sons, Limited, hereinafter
called " Messrs.
Waterlow ", from an Order of the Court of Appeal
dated the
26th day of March, 1931, varying the Judgment and
Order of the
Honourable Mr. Justice Wright, dated the 12th day
of January,
1931. The Learned Judge directed judgment to be
entered for the
Bank for £569,421 with costs. The Court of
Appeal, by a
majority consisting of Lord Justice Greer and Lord
Justice
Slesser, directed that judgment should be entered for the
Bank for
the reduced sum of £300,000, Lord Justice Scrutton
dissenting
from that Judgment, for in his view the Bank of
Portugal was only
entitled to the sum of £8,922, which was covered
by a
payment by the Defendants into Court of £10,000.
The Bank is the Central Bank of
Portugal and is incorporated
by Special Charter under the Laws of
Portugal. Since 1887 it has
held from the Government of Portugal
an exclusive license for the
issue of bank notes as legal tender
in Portugal and the adjacent
Portuguese Islands, but this license
does not extend to the issue of
bank notes for the Portuguese
Colonies. At all dates material to
this case the currency of
Portugal was composed solely of notes
issued by the Bank. The Bank
act as Bankers to the Portuguese
Government and carry on a general
banking business, having a
head office in Lisbon, a branch office
in Oporto, and agencies and
correspondents in various towns and
places throughout Portugal
and the Islands.
The Governor of the Bank is
appointed by the Portuguese
Government and presides at Directors'
meetings. The Directors
at all material times selected the names
of three of their number,
out of which the Government in its turn
selected one to act as Vice-
Governor. The Directors are
appointed by the General Meeting
of the Shareholders. The
Government also at all material times
appointed a
Secretary-General whose duties were defined by
Article 66 of the
Statutes of 1892. This Article prescribed (inter
alia) that he
shall " satisfy himself of the strict observation of the
"
Bank's Statutes and regulations ... in order to be able to
"
appreciate the situation of the Bank as regards the safeguard of
"
the Public interest and of the fiduciary circulation." He
did
not vote at Directors' meetings.
Messrs. Waterlow are a
well-known firm of printers having
their registered office at 26,
Great Winchester Street in the City of
London. A considerable
proportion of their business consists of
bank note and security
printing. Under a contract dated the 27th
November, 1922, and a
repeat order under that contract dated the
2 [2]
20th February, 1924, the Bank
employed them to print and supply
certain bank notes required by
the Bank for issue in Portugal.
Under this contract and repeat
order Messrs. Waterlow supplied
to the Bank 600,000 notes of a
face value of 500 Escudos. The
said notes contained on their face
a portrait of Vasco da Gama
and are referred to as 500 Escudos
notes of the Vasco da Gama
type. These notes were delivered to the
Bank in 1923 and 1924
and all or nearly all of them were put into
circulation. The value
of the Escudo at dates material to this
case was approximately
Two Pence Halfpenny, so that a 500 Escudo
note was worth
approximately £5.
The notes of the Bank are at
present inconvertible; that is to
say, the Bank is under no
obligation to replace them when pre-
sented by anything else than
its own notes. The Learned Judge
found, and the Court of Appeal
agreed with him, that the prospect
of the notes ever becoming
convertible with gold was so remote that
it might be disregarded.
With that finding I agree. The amount
of notes which could be
issued was controlled by law. Within these
limits it was subject
to the policy of the Bank. The right was
accompanied by conditions
as to the maintenance of reserves and
prohibitions as to certain
classes of business.
For example:—By Article 28 of the Law of the 29th of July,
1887.
The Bank is expressly forbidden
from carrying out the follow-
ing operations:—
(a) To purchase for its
own account any shares in the
Bank.
(b) To rediscount its own bills.
(f) To undertake any risky negotiations or insurance.
(g) To buy and sell, for
its own account, any commercial
goods.
(h) To possess real
estate and rights apart from the City
premises necessary for the
carrying out of its functions, except
through the effect of any
assignment or Public Sale, or in
order to secure the repayment of
credits, but it will have to
proceed to the liquidation of such
goods (or " estate ") within
the shortest period
possible.
Again, there was an obligation
upon them to issue notes on Govern-
ment service. Finally, it must
be remembered that the Bank is a
Bank of Issue with control and
management of the currency. Its
directors were only entitled to
issue notes as far as in their reason-
able opinion it was right
and proper for them to do so in their
capacity as guardians of the
currency of the country.
In the course of 1925 Messrs.
Waterlow, as if has been found
by the Courts below, and as they
admitted on Appeal, were guilty
of a breach of an absolute duty to
the Bank under the contracts
referred to because, without
authority from or the knowledge of
the Bank, they printed and
delivered to one Marang van Ysselvere
580,000 notes of 500 Escudos
of the Vasco da Gama type.
Marang was one of a group of
criminals, among whom was the
Portuguese Minister at the Hague.
The criminals having
[3] 3
obtained the notes from the
Messrs. Waterlow introduced them
into Portugal and proceeded to
put a very large number of them
into circulation there.
These notes were printed either
from the same plates as had
been used for the notes printed for
the Bank or from plates made
from the same die. Each of the Bank's
notes bore a serial letter
and number and the signatures of the
Governor and one or other of
the Directors. 490,000 of the said
580,000 were exact duplicates
of notes printed for the Bank and
were indistinguishable from the
genuine notes delivered to and
issued by the Bank except by certain
tests unknown to the Bank and
depending on data which were
exclusively in the possession of
Messrs. Waterlow. These tests
involved various matters, such as
the existence and the significance
of minute letters on the
genuine and the unauthorised notes and
of minute differences
between the genuine and the unauthorised
notes in the distance
from one typographical element to another on
the face of the note.
The notes were delivered to Marang as to
200,000 in February and
March, 1925, and as to 380,000 from
August to November, 1925.
In order to facilitate the
putting into circulation of very large
quantities of these notes
the criminals formed a Bank known as the
Banco Angola e Metropole.
Under Portuguese law in order to
constitute and operate a Bank it
was necessary to obtain the
authority of the Minister of Finance,
who was advised on such
matters by a body known as the Banking
Council. The Minister
of Finance on the 27th June, 1925,
authorised the formation of
the Banco Angola e Metropole on the
condition, among others, that
the capital of that Bank, the
minimum figure for which he had
previously fixed at 20,000,000
Escudos, should be fully subscribed.
This condition was accepted
and as the criminals had already
received notes to an amount of
100,000,000 Escudos from Messrs.
Waterlow, they were able promptly
to comply with it.
The Banco Angola e Metropole,
having been formed, proceeded
to carry out transactions on a large
scale, but their business fell
under suspicion and upon the 19th
November, 1925, the Minister
of Finance instructed the Inspector
of Banking Commerce to
investigate their activities. On Friday,
the 4th December, 1925,
the Manager of a private Bank in Lisbon
called upon Dr. Ulrich,
a Director of the Bank, and informed him
of certain suspicious
dealings affecting the Banco Angola e
Metropole at Oporto, and
Dr. Ulrich communicated with the
Assistant Judge of Criminal
Investigation. On the evening of that
day a number of officials
both of the State and the Bank went to
Oporto. On the following
day the premises of the Banco Angola e
Metropole were searched
by the police. Many packets of 500 Escudo
notes of the Vasco da
Gama type were found, but apparently the
notes, though new, were
not consecutive, nor were the series the
same. Instructions were
given that all notes of this type in the
Oporto branch of the Bank
should be arranged in series, and also
that 2,000 of the notes found
on the premises of the Banco Angola
e Metropole should lie similarly
arranged. Late on the night of
the 5th. Saturday, or early on the
Sunday morning, the 6th. four
notes, each in duplicate, making
eight in all, were discovered
among those in the Bank's Branch
and this was conclusive proof of
forgery.
The Bank's officials returned
immediately to Lisbon, and on the
Sunday evening a meeting of the
Bank's Directors was held. The
position was certainly alarming. It
was obvious that there were
forged notes in existence, but how,
when, where and to what extent
the forgeries had taken place was
entirely unknown. After pro-
longed consideration, the Bank
resolved to withdraw from circula-
tion the notes of 500 Escudos,
2nd Plate, gold, on which appeared
4 [4]
the effigy of Vasco da Gama. The
notice was given in the following
terms, and was published in the
'' Diario de Noticias " and in
the " Seculo " of
the 7th December, 1925, and other papers:
" The Administration of the
Bank of Portugal has
" resolved to withdraw from circulation
the notes of 500
" Escudos, 2nd plate, gold, on which appears
the effigy of
" Vasco da Gama.
" In view of this
resolution, the notes of this type and plate
" now in
circulation are to be exchanged for others of the same
" or
some other denomination at the Head Office of the Bank
" in
Lisbon, at the Branch Office in Oporto and at the Offices
"
of its Agencies on the Continent and in Funchal.
" Lisbon, 7th December, 1925.
" For the Bank of
Portugal.
" THE DIRECTORS:
" J. motta gomes, Junior,
" manuel casal ribeiro carvalho."
The result was a run on the
Bank, and in the course of the next
few days many thousands of
notes both good and bad of the Vasco
da Gama type were brought by
their holders to the Bank or one of
its branches, and for each
note so brought into the Bank, the Bank
handed to the holder a
good note for 500 escudos.
On the 7th December the Bank
telegraphed to Messrs. Waterlow
as follows:—
(Despatched at 2.25 p.m. Reed. 5.14 p.m.)
" Imprimerie,
" London. 7th December, 1925.
" Great falsification notes
of five hundred Escudos send
" expert Lisbon urgently to
examine. Make investigations on
" your side.
" Bank of Portugal,
" camacho rodrigues."
Messrs. Waterlow replied in the following terms:—
" Camacho Rodriguez,
"
Bank of Portugal,
" Lisbon. 8th December, 1925.
" Your cable 7th received.
Arranging for expert to leave
" London immediately. Will wire
you actual time and
" departure. Write fully and send
specimens.
" waterlow & sons,
ltd."
(Despatched 12.25 p.m. Received 1.56 p.m.)
Sir William Waterlow,
accompanied by two other of his
directors, had interviews with
Colonel Lucas in London, who was
acting on behalf of the Bank, and
eventually left for Lisbon, where
he arrived upon the 13th
December. Meantime the Bank had been
exchanging the notes in the
way above mentioned.
It ought here to be said that no
suggestion has been made, or
can be made, against the honesty of
Messrs. Waterlow. They were,
just as much as the Bank was, victims
of Marang's fraud, but when
Sir William Waterlow arrived in Lisbon
he was an object of
suspicion (as indeed the Directors of the Bank
themselves had been)
and was for a time kept at arm's length.
[5] 5
In the result, the Bank finally
found itself in possession of
799,190 Vasco da Gama notes, and of
these it was subsequently
ascertained that 209,718 were notes
printed without authority by
Messrs. Waterlow for Marang, and
which are hereinafter referred
to as " the, Forged notes."
On December 1st, 1925, the note
circulation of the Bank con-
sisted of two classes: (1) notes
issued as loans to the Government
which the Government would put
into circulation, and (2) notes
issued by the Bank for its
ordinary commercial needs, against a
certain specified reserve of
gold much less than the face value of
the notes.
The total note circulation in
Portugal was about 1,700,000,000
Escudos (seventeen million
pounds). Messrs. Waterlow had printed
and delivered to Marang
notes to the value of 290 million Escudos,
or about one-sixth of
the total note issue. Of these, notes to a
value of over 100
million Escudos (one million pounds) had been
put into
circulation. They had been put in circulation from time
to time
from some date in the first half of 1925. They must have
passed
from hand to hand. Many of them must have been paid
into the
Bank's head office or some branch office of the Bank, and
been
re-issued. On such notes the Bank would certainly be liable,
and
it had no means of knowing whether any note had, or had not,
been
re-issued
Notes to the value of
195,630,000 Escudos had been authorised
against a 15 per cent,
minimum gold reserved for the Bank's com-
mercial business as
bankers. Of this amount the Bank had prior
to the 7th December,
1925, issued about 65 million Escudos. The
unissued balance of
about 131 million Escudos constituted reserves
on which the Bank
could draw as and when they required to do so.
It may here be
stated that as a result of Messrs. Waterlow's breach
of contract,
the note issue was increased by approximately
104,859,000 Escudos,
and the unissued balance was thus consider-
ably reduced.
Within a short space of time,
i.e. by July, 19th, 1926,
the Bank obtained a considerable
increase in its power to issue
notes. The Government by the Prime
Minister had approved of
the original action of the Bank on
December 6th, 1925, and the
delay in regulating the position, as
appears from the preamble to
the Decree of July 19th, 1926.
resulted from a change of Govern-
ment, which interrupted
negotiations. That Decree authorised
(1) an issue of a hundred
million Escudos to be repaid out of the
anticipated indemnities
from Waterlows. It is not suggested that
this loan from a third
party can be used to reduce damages due
from Waterlows: (2) a
further issue of a hundred million Escudos
to be used for
commercial operations; (3) a further issue of
125 million Escudos,
to be used in colonial development, which
does not affect this
case.
The Plaintiffs, the Bank, issued
a writ upon the 5th day of
April, 1928, claiming damages for
breach of contract and /or
negligence and/or conversion. In their
Statement of Claim, the
Plaintiffs added a count under the
Copyright Act, but this and the
claims for negligence and
conversion were not pressed on appeal,
and they relied upon the
Breach of Contract only. Such Breach
of Contract is set out in the
9th paragraph of their Statement of
Claim and is as follows :
" In breach of the express
terms of the said contract
" and /or negligently and in
breach of the implied terms as
" set out in paragraph 4
hereof and /or negligently and in
" breach of the duty set
out in paragraph 5 hereof, the
" Defendants between January,
1925, and September. 1925.
" without the authority of the
Plaintiffs printed from the said
6 [6]
" plates and /or from
plates made from the said die or dies
" on paper made to the
Plaintiff's specification and bearing
" the watermark "
Banco de Portugal " and delivered in
" London to one
Marang a Dutchman about 580,000 bank-
'' notes of the value of 500
Escudos each of the said Vasco da
" Gama design purporting to
be banknotes of the Plaintiff
" Bank."
The particulars of damage
originally amounted to the sum of
£1,115,613, but the Bank
professed itself willing to give credit, for
the sum of £488,430,
which they had received in the liquidation of
the Banco Angola e
Metropole, and so the net claim was £610,392.
By their Amended Defence,
Messrs. Waterlow denied that the
Contract of the 27th November,
1922, was subject to the implied
terms alleged; they denied that
they were guilty of any breach of
the express or implied terms of
the contract; they denied that the
Bank had suffered any loss and
alleged in the alternative that, if
the Bank had suffered any
loss, such loss was caused solely by the
Bank's own voluntary act
in withdrawing from circulation the
Vasco da Gama 500 Escudo notes
and exchanging them for other
notes although the Forged notes or
some of them which were in
circulation were distinguishable from
the authorised ones and
although the Bank were under no liability
to pay the unauthorised
notes; and in the further alternative they
alleged that any damage
was caused by or contributed to by the
negligence of the Bank.
In this state of the pleadings,
the matter came before the
Learned Judge. In effect he rejected
the contentions of Messrs.
Waterlow, both as to the amount of
damage and the measure of
damage. He, however, was of opinion that
by December 16th, the
Bank knew (or ought to have known) the tests
by which they could
distinguish some of the forged notes from the
authorised notes,
and he held that from that date Messrs. Waterlow
were not liable
for damages in respect of the good notes which
they gave in
exchange for forged notes, and upon this basis gave
judgment for
the amount above referred to, and not for the whole
of the Bank's
claim.
When the matter came before the
Court of Appeal, all the
Learned Lords Justice agreed that the
Bank were justified in
calling in the Vasco da Gama type notes and
exchanging good notes
both for the authorised and Forged notes,
but Lord Justice Greer
and Lord Justice Slesser came to the
conclusion that the Bank knew
(or ought to have known) how to
distinguish between the authorised
and the Forged notes by
December 10th, instead of by December
16th, as Mr. Justice Wright
had held, and acting upon this finding
they reduced the damages to
a round sum of £300,000 to cover all
items. Lord
Justice Scrutton took a contrary view. He was of
opinion that the
Bank were justified in exchanging all notes up to
as late a date
as December 26th, but he also held that a different
measure of
damages applied : namely, that the only loss which the
Bank had
really suffered was the loss incurred in printing new notes
to
give out in exchange for the Vasco da Gama issue.
In the result, judgment from the
Court of Appeal was given for
£300,000, and from that the
present appeal is brought.
The main questions in the Appeal are briefly :
(a) Whether the Bank, issuing an
inconvertible currency,
i.e., having right to issue notes but no
obligation to honour
them otherwise than by giving in exchange
other notes, until
some future return to convertibility at a date
so remote and
unlikely to occur that it could riot be taken
practically into
account, suffered any other than a merely nominal
loss (apart
from the cost of printing) when they called in bad
notes put
into circulation by forgers and gave good notes in
exchange for
them.
[7] 7
Messrs. Waterlow, on appeal, did
not dispute the proposition
that they were guilty of a breach of
absolute duty under an implied
term of the contract.
It will be convenient to take
first the question whether the Bank
were justified in exchanging
new notes for the Vasco da Gama
notes (both authorised and forged)
as and when they did. It will
be observed that upon this point we
have concurrent findings in the
Courts below. Both Mr. Justice
Wright and all the three members
of the Court of Appeal held that
they were, the only difference of
opinion being up to what period
they were so justified.
In coming to a proper
determination of this question, it is
important to recollect the
position of the Bank both before and
after the discovery of the
forgeries. It will be recollected that
the Bank was in effect the
National Bank of Portugal, the sole
issuing Bank in that country,
and the Bank upon which the credit
and currency of the country
depended. This appears from the
answers given by Dr. Ulrich in his
examination in chief :
Q. 286.—Supposing
that you had refused to pay any Vasco
da Gama notes, what would
the effect have been on the public
as regards your issue of notes
altogether, in your opinion?
I think the effect would be very
extremely serious because
the people seeing that the Bank were
refusing a note of a certain
type would easily have been inclined
to think that next day
another can be refused in the same way. In
these conditions
there would have been a general discredit for all
the notes of
the Bank, that means for the total currency of the
country. I
cannot really easily foresee the effects coming from
such a
measure, but it is easy to understand that if anybody
has
merchandise in his power of a certain and definite value
he
would have refused to exchange his merchandise against a
piece
of paper of a doubtful value or discussed value, so the
country
would have been brought to a general stoppage for
the
economical life of the country and naturally the people
in
Portugal would have taken the most severe violences against
the
Bank, and I am sure that a Revolution would have been
brought
about by this fact.
Q. 287.—In your
opinion, that would have been the
internal result in Portugal
?—Yes.
Q. 288.—What about
the external result as regards
Foreign Exchanges I
8 [8]
I think the market for
Portuguese currency abroad would
have been suppressed at once, no
bank would have been willing
to sell Escudos when they knew the
Escudos were paid in paper
of doubtful value and of discussed
value, so the Foreign
Exchanges of the country probably also would
have been
stopped.
Similar evidence was given on
the Bank's behalf by other
witnesses called by them, and the
Learned Trial Judge said :—
" The justification for
acting with such promptitude
"which is put forward, and I
think put forward with
" foundation, was that it was already
known and could not be
" suppressed that there was this great
falsification of notes
" going on, that the only way to avoid
a financial crisis and
" an entire upheaval of the currency
was to withdraw this
" issue, and that there was no
opportunity of further delay
" because the consequences of
delay would have been too
" serious to contemplate. ... At
least 4,000 notes ready
" to be issued had been found in the
Banco Angola e
" Metropole, and what the Plaintiffs did was
simply done in
" order to maintain the credit of their
currency and of their
" Bank, and was, so far as I can judge,
and as I hold, done
" reasonably in all the circumstances. It
was a necessary and
" indeed, in all the circumstances, an
inevitable consequence
" of the falsification and circulation
of these spurious notes."
Lord Justice Scrutton, commenting upon this, says:—
"The Judge below has found that by December 16th the
" Bank might have discovered a means of identifying some of
" the forged, notes. The Bank by Government Decree stopped
" paying all Vasco da Gama 500-Escudos notes after December
" 26th. Mr. Justice Wright has deducted from the damages
" £80,000, for notes paid after December 16th. As he finds
" that the Bank were justified in their action on December 7th
" in calling in the issue and paying all notes, he must have
" found that they would have been justified when they could
" distinguish the forged notes, which innocent holders could
" not do, in refusing to pay some forged notes, while paying
" others. Such an action in my opinion would destroy all
" confidence in the paper currency. It was the Bank's own
" printers who had from the Bank's own plates wrongly put
" this unauthorised currency on the market. It was indis-
" tinguishable to innocent holders from genuine currency, and
" I cannot think the Bank was bound to sacrifice innocent
" holders and the reputation of its national currency to protect
" the printers, the wrongdoers."
In England the law is that a
person is not obliged to minimise
damages on behalf of another who
has broken a contract if by doing
so he would have injured
his commercial reputation by getting a
bad name in the trade.
Finlay & Kwik Hoo Tong, 1929 1K.B. 400.
The evidence is that
the Bank—remembering always that they
were the issuing Bank
of the paper currency—had to protect
before anything else
the confidence which such currency inspired
in the Portuguese
public. ' What confidence," they asked,
"
would all the other notes of the Bank of Portugal
merit
" if the Bank did not adopt such a policy?' "It
is one,"
they say, ' always adopted and similar to
that adopted as
" a rule by banks of issue, even
when they can allege the forgery
" is manifest and that the
public has not taken the precautions
" necessary in receiving
false notes." I have come to the con-
clusion that the
Bank would have been failing in their duty to their
shareholders,
their customers and their country if they had not
taken the step
they did.
[9] 9
In my opinion these findings are
correct, and the Bank had no
alternative on December 7th but to do
what they in fact did. They
were in a position of extreme
difficulty and extreme danger, caused,
as I think, by the
unfortunate and unwitting breach of contract
on the part of
Messrs. Waterlow.
As the Bank urge, for a country
to find that what it believed
to be a substantial portion of its
legal wealth was nothing more
than worthless pieces of paper
instead of genuine notes of the Bank
would have created an
economic panic and confusion which would
have caused the gravest
damage to the credit of the Bank and
might even have shaken the
whole economic and commercial life
of the country.
I now pass to a consideration of
whether December 10th, as
Lord Justice Greer and Lord Justice
Slesser held or December
16th, as Mr. Justice Wright held or
December 26th as Lord Justice
Scrutton held, is the correct date
for determining when the Bank's
knowledge was of such a character
as disentitled them from
exchanging new notes for the Vasco da
Gama notes, both
authorised and forged. I would add here that the
Learned
Counsel at the Bar of Your Lordships' House, arguing on
behalf
of Messrs. Waterlow, endeavoured to persuade the House that
the
Bank ought not to have acted so precipitately in giving notice
of
calling in, and that they must have known by December 9th how
to
distinguish between the authorised and the forged notes, and
so
that they ought not to have exchanged any more after that date.
This is, largely, a question of
fact, but having come to the
conclusion that the Bank were
entitled to issue their notice on
December 7th, I reject the
argument for Messrs. Waterlow that
the Bank acted too
precipitately, and the only question therefore
remaining is
whether December 10th, December 16th or December
26th is the
proper date to take as being that upon which the know-
ledge of
the Bank was such as disentitled them from paying out
further good
notes.
It appears to me that Lord
Justice Scrutton was right for his
reasons above referred to in
rejecting the contention that December
10th or December 16th was
the date to be taken as the one upon
which the Bank, knew or were
in a position to know, how to dis-
tinguish certain of the notes.
The Bank in fact exchanged new
notes for forged notes as late as
July, 1927. Logically I
can see no reason why they should not
claim from Messrs.
Waterlow any damage properly flowing in respect
of notes so
exchanged so late, and upon this showing even the date
fixed by
Lord Justice Scrutton of December 26th would have to be
recon-
sidered. I agree, however, that December 26th is the proper
date
and for the following reason. By a notice issued by the
Ministry
of Finance in Portugal it was ordered that the 22nd day
of
December should be fixed as the last day for the exchange of
notes.
This date was subsequently extended to the 26th December,
and I
am content to leave it at that.
What then is the amount of
damages to which the Bank are
entitled upon that date, subject to
the question of the correct
measure of damages ?
Taking December 26th as the
date, it remains to be considered
how the sum of £488,430
which the Bank recovered in the liquida-
tion of the Banco Angola
e Metropole is to be dealt with. It was
contended by Messrs,
Waterlow that this sum ought to be treated
as salvage in respect
of the total loss suffered by the Bank in
respect of the
unauthorised notes. It wais said that in the present
action the
amount to be recovered was in respect of part only of
those notes,
namely, 209,718 less 16,000 notes, and that any credit
to be given
must be based on the same subject matter, namely,
10 [10]
salvage in respect of 209,718
less 16,000 notes, i.e. twelve-thirteenths
of £488,430,
namely £450,860. In my view this is not the true
principle
applicable. Legally, Messrs, Waterlow may not be
entitled to any
credit in respect of this sum of £488,430, as the
amount was
recoverable against different parties and on a different
cause of
action. The Bank, however, do not desire to stand upon
their
strict rights, and in my opinion, if the total amount to be
recovered
from Messrs. Waterlow added to the sum of £488,430
exceeds
the total loss actually incurred, Messrs. Waterlow should
have
credit for such excess. The Bank's total loss was £1,092,281
plus
£6,541. Against this, credit should be given for
£488,430,
leaving a net loss of £610,392. This is the
principle laid down by
the Court of Appeal in the case of the
Morgengry and The Black-
cock, 1900 P. p. 1, and it is that
principle which in my view should
be following in the present
case.
I now pass to the question :
What is the true measure of
damages ?
Two points are taken on behalf
of Messrs. Waterlow. They
contend
As to (1), the law is as follows
: The leading case in English law
is that of Hadley v.
Baxendale, 1854, 9 Exchequer, Page 341,
where it is laid down
by Mr. Baron Alderson, giving the Judgment
of the Court:
" We think the proper rule
in such a case as the present
" is this: Where two parties
have made a contract which one
" of them has broken the
damages which the other party ought
" to receive in respect
of such breach of contract should be
" such as may fairly and
reasonably be considered arising
" naturally, i.e. according
to the usual course of things, from
" such breach of contract
itself, or such as may reasonably be
" supposed to have been
in the contemplation of both parties
" at the time they made
the contract, as the probable result
" of the breach of it.
Now if the special circumstances under
" which the contract
was actually made were communicated
" by the plaintiffs to
the defendant, and thus known to both
" parties, the damages
resulting from the breach of such a
" contract which they
would reasonably contemplate, would
" be the amount of injury
which would ordinarily follow from
" a breach of contract
under these special circumstances so
" known and
communicated. But on the other hand, if these
" special
circumstances were wholly unknown to the party
" breaking the
contract, he at the most could only be supposed
" to have had
in his contemplation the amount of injury which
" would arise
generally, and in the great multitude of cases,
" not
affected by any special circumstances from such a breach
"
of contract. For had the special circumstances been known,
"
the parties might have specially provided for the breach of
"
contract by special terms as to the damages in that case,
"
and of this advantage it would be very unjust to deprive
[11] 11
" them. The above
principles are those by which we think
" the jury ought to be
guided in estimating the damages
" arising out of any breach
of contract."
It was similarly stated by Lord
Blackburn in the House of
Lords in Livingstone v. The
Rawyards Coal Company (1880) L.R.
(5 A.C. 25, at Page 39), in
these words :—
" Where any injury is to be
compensated by damages, in
" settling the sum of money to be
given for reparation of
" damages you should as nearly as
possible get at that sum of
" money which will put the party
who has been injured, or
" who has suffered, in the same
position as he would have been
" if he had not sustained the
wrong for which he is now
" getting his compensation
or reparation."
There is no doubt as to the law;
the real difficulty is to apply it to
the peculiar facts of this
case.
The first question is, "
Was this loss one which could reason-
" ably be supposed to
have been in contemplation by both parties
" at the time of
the making of the contract as to the probable
" result of the
breach? " This rule has often been criticised on
the ground
that people when they make contracts do not contem-
plate their
breach. Be that as it may, I have come to the con-
clusion that
Lord Justice Greer was right in taking the view that
it would be
naturally in the usual course of things, and would be
within the
contemplation of the parties (1) that in circumstances
like those
which happened in the present case, the Bank would be
compelled
for their own protection to issue a public notice inform-
ing the
holders of their notes that the only notes of which forgeries
had
been discovered were the Vasco da Gama issue; and (2) that
they
would also be compelled in the interest of their own credit
and
currency to act reasonably in the matter, and (3) that it
would be
reasonable to exchange any of those forged notes which
were
presented for payment for valid notes of an equal value.
Once
this is found, as it has in my view been rightly found in
this case,
that the Bank acted reasonably, and it is also found
that Messrs.
Waterlow committed a breach of contract, the
resulting conse-
quences from such reasonable action must be
damages which the
Bank are entitled to receive in respect of
breach of contract,
because they are damages fairly and reasonably
to be considered as
Arising naturally, i.e., occurring in the
usual course of things from
such breach of contract, as the
probable result of the breach.
As to (2), I now turn to the
Last and, in my opinion, most
difficult part of the case.
Was the loss suffered by the
Bank merely nominal and was the
only sum recoverable by them the
cost of printing and paper in
regard to the new issue?
Upon this point Mr. Justice Wright said : " In Portugal these
" notes are currency. They are the currency of Portugal. They
" can purchase commodities in Portugal, including gold, which
" after all is only a commodity like any other, though it is raised
" in financial affairs to a special pre-eminence as a convenient
" medium for fixing values, they can buy foreign exchange, that
" is sterling or dollar
exchange, they can buy any exchange in any
" currency which
is convertible and they "do that because they
" have behind them the credit, that is the liability, of the Bank
"of Portugal."
And Lord Justice Greer states it in a similar way. He says :
" Every 96 Escudos issued by the Bank in form of paper notes in
" exchange for the Marang (forged) notes was worth £1 in English
" money, because it would buy in Portugal, and by exchange all
" over the world, the same amount of goods as the pound sterling
14824 A 6
12 [12]
" would buy. . . . In my
judgment the Bank are entitled .to
'' say to the Defendants ' By
your wrong I lost a certain number
" ‘of Escudos worth
X pounds, give them back to me in English
" ‘ money at
the rate of exchange at the date of my loss.'
In the present case the Bank, by
reason of Messrs. Waterlow's
breach of contract, had to increase
their note issue by 104,859,000
Escudos, and received in exchange
for each bank note no value at
all, but only worthless bits of
paper.
Upon each of the good notes so
exchanged, the assets of the
shareholders were diminished to the
extent of the liability which
the Bank assumed for the good note
which they had given in
exchange for the worthless note.
Some confusion appears to me to
have arisen in this case by
dwelling too much upon the fact that
the notes were not convertible
into gold. In my opinion that fact
has nothing to do with the
case. In a country where there is a
managed currency a note when
issued by a Central Bank becomes part
of the currency of the
country and obtains a certain value which
may for the moment be
called its market value. The fact that it is
not convertible into
gold is reflected in the price the note
fetches in the terms of any
foreign exchange. We are not here
considering the case of an
unlimited right to issue notes. The
essence of the right conferred
on the bank of issue in this case
was the ability, within limits
allowed by law, to print and issue
its notes as currency and for
value. The notes are the currency of
the country, and have the
value of that currency when issued.
Whatever may be the con-
ditions imposed as to reserves and
whether the currency is
convertible or inconvertible, a bank of
issue receives value for every
note which it issues.
This consideration has to be
kept in view during the whole of
the present case. It must never
be forgotten that the Bank was a
bank of issue. The notes may be
advanced as loans to the Govern-
ment or private persons; they may
be used to buy gold or securities,
to discount bills or to pay the
Bank's debts, and the notes may also
be received from a customer
of the Bank in order to reduce an over-
draft at the Bank. In
every instance the Bank obtains the currency
value of the notes,
or may receive it, in discharge of a liability due
to the Bank
.
Analogies may be misleading, if
not dangerous, in these peculiar
and unusual circumstances. The
simplest way of posing the
problem is to imagine two persons
coming into the Bank at, the
same time, each of them wanting a
good 500 Escudos note. The
first is an Englishman who wants to get
some Portuguese money.
He hands over to the Bank five English
pounds, and gets in return
a 500 Escudos note. The other person
hands over a forged note,
and also gets a 500 Escudos note. What
is the position of the Bank ?
In the first case it has obtained in
exchange for the 500 Escudos
note five pounds in English money; in
the second case it has got
in exchange for the 500 Escudos note a
worthless forged note.
It is not possible to say that in the
second case the Bank has suffered
no damage because it could print
and issue a third 500 Escudos
note should it so desire to do. For
that note it could also have
obtained value. In truth it has lost
the face value of the second
note by reason of the fact that it
has only got a worthless note in
exchange.
I am, however, unable to accept
in its entirety the argument
put forward by the Bank in their
Reason 16, where it is stated
that the Bank's notes, being the
currency of the country, have the
same value in their hands as in
those of third parties. What
exactly is meant by the words "in
their hands" it is difficult to
appreciate. A banknote is,
after all, merely a promise to pay in
[13] 13
some form or other. Supposing
the Bank had had in its cellars,
say, for example, 1,000 of these
notes, and owing to the negligence
of some contractor who happened
to be engaged in repairing the
premises, a fire had broken out and
all the new unissued notes in
the Bank's cellars had been burnt,
it would not be possible to
contend that the contractor whose
negligence had. caused the loss
of the notes would be liable for
their face value. He might in such
an instance be liable for the
cost of paper and printing of each
note, but it is a completely
different position when the notes,
instead of remaining in the
cellar, are rightly, as is found in this
case in the
circumstances, put into circulation by the Bank. Then
their value
is entirely changed. Again, it is possible to conceive
of cases
where a person who has been deprived of a chattel by the
negligence
of another is entitled to recover from such other the
replacement
value of such chattel, but the present case is not an
example of
that character. Here the issue of the note and putting
it into the
currency of the country, which the Bank were entitled
to do, makes
all the difference.
For these reasons, I am of
opinion that the Appeal of the Bank
succeeds and that judgment
should be entered for the Bank for the
sum of £610,392. The
appeal of Messrs. Waterlow should be
dismissed.
A 7
[14]
Lord
Chan-
cellor.
Lord
Warring-
ton of
Clyffe.
Lord
Atkin.
Lord
Russell of
Killowen.
Lord
Macmillan.
BANCO DE PORTUGAL (Appellants)
v.
WATERLOW AND SONS,
LD. (Respondents)
and
WATERLOW AND SONS, LD.
(Appellants)
v.
BANCO DE PORTUGAL
(Respondents)
(Consolidated Appeals).
Lord Warrington of Clyffe.
My lords,
I do not propose to restate in
detail the facts already related
in the opinion of the Lord
Chancellor but only to give a summary
sufficient to render my
conclusions intelligible.
[15] 2
500$ each. They are known as
notes of the Vasco da Gama type,
bearing as they do a
portrait of Vasco da Gama on the face. These
600,000 notes as
delivered were put into circulation by the Bank
in 1923 and 1924.
3 [16]
On this claim the following questions arise :-
[17] 4
by " damages " I mean
only such damages as are claimed by the
Bank. There may be loss or
damage of another kind but this is not
in question.
" correct, and I think
these notes must be taken for this purpose
" at their face
value, just as they would be if they had been issued
" by
some other institution that is not a Bank of issue." With
all
respect, I cannot accept the conclusion of the learned judge.
It
seems to me that by treating the Bank on the same footing as ''
any
" other institution "
he ignores the vital distinction, viz., that the
obligation
incurred by the Bank is merely to pay in other currency
which it
has power to create for the purpose, whereas the institu-
tion not
a Bank of issue would have to procure the necessary cur-
rency by
expenditure of money or sale of goods or in some similar
way or
pay it out of currency already in hand. In fact, the 16th
Reason
breaks down on examination, and its corollary the 17th falls
with
it.
' justified in their action on
7th December in calling in the issue
" and paying all notes,
he must have found " (viz., in arriving at
the conclusion
that they should have ceased on the 16th December
to pay all the
spurious notes without distinction) " that they would
"
have been justified, when they could distinguish the forged notes,
" which innocent holders
could not do, in refusing to pay some forged
" notes, while
paying others. Such an action in my opinion would
" destroy
all confidence in the paper currency It (the
A9
14824
5 [18]
" unauthorised currency)
was indistinguishable to innocent holders
" from genuine
currency, and I cannot think the Bank was bound
" to
sacrifice innocent holders and the reputation of the national
"
currency to protect the printers, the wrong doers." I think
the
right, as against Messrs. Waterlow, continued until the 26
De-
cember.
Under the circumstances no
question arises as to the sum re-
covered from other persons.
I need hardly say that it is
with great regret after anxious con-
sideration, I have arrived at
the conclusion that I must differ from
opinions, for which I have
the greatest possible respect, but it is
some consolation that I
do so in good company. I should also like
to say that I have been
much assisted by the very clear and forcible
argument of Mr. Gavin
Simonds in reply.
[19]
BANCO DE PORTUGAL.
v.
WATERLOW & SONS.
Lord Atkin.
Lord
Chan-
cellor.
Lord
Warring-
ton
of
Clyffe.
Lord
Atkin.
Lord
Russell of
Killowen.
Lord
Macmillan.
MY LORDS,
A Bank note is a promissory
note issued by a Bank payable on
demand. The English note
contains the promise on the face. The
Portuguese note does not,
but there is competent evidence in this
case that the note has
the same effect. So far the banker issuing
his note incurs
precisely the same liability as a merchant issuing
his note. If
either fails to pay he is liable for the face value of the
note.
One Bank becomes alone entitled to issue notes; and let
us assume
that they have become currency so that they can be
tendered in
discharge of a debt: the position of the Bank remains
the same-
It is liable on its note. If its note is payable in gold
then to
a claim on a note the Bank must pay in gold : otherwise on
2 [20]
debts in general the Bank as
well as private traders will pay in
currency: and as I have said
on default will be liable to judgment
for the face value. In any
civilised State it will not be permitted
to issue notes to an
unlimited amount: it will, if honestly conducted
in any case
determine its obligations by its possible resources: but
the State
will require that behind the promises to pay there stand
solid
resources in the form of gold and liquid securities: and will
impose
a positive restriction on the issue of notes beyond an amount
which
it considers necessary. But this has no bearing on the liability
of
the Bank to pay the face value of a note when issued.' Now let
us
assume that the State alters the law by decreeing that the Bank
notes
need no longer be paid in gold. While that decree lasts the
notes
are inconvertible, the currency is in the ordinary sense a
paper
currency. This happened in Portugal in 1891 by a
moratorium
directed to payment in gold which has been continued in
Portugal
ever since. The position has not altered. The merchant is
in pre-
cisely the same position as before : he must pay in
currency which
will as before be notes but now inconvertible
notes. If he fails to
pay he can be sued for the face value of his
promissory note. The
Bank is for the first time put in the same
position as the merchant:
it is bound to pay on its note: but it
need only pay its note in
currency, i.e., in its own notes: and if
it will not or can
not so pay, it can be sued for the face value
of the note.
Mr. Simonds for Messrs. Waterlow produced an analysis
of the
obligation of the Bank in issuing an inconvertible note
with which
in substance I agree. It is 1. to pay in other notes,
2. when there is
a return to gold to pay in the decreed amount of
gold, 3. if other
currency is decreed to pay in that other
currency. But how this helps
him it is difficult to see : for on
examination it will be found that
the obligation of a trader on
his note is precisely the same, except
that 2. will probably only
be to pay in notes convertible into gold
instead of paying in gold
itself. Now in the case of a private trader
it appears to be
conceded that his loss in similar circumstances would
be measured
by face value. On this analysis the obligation of the
Bank would
appear to be the same. That it meets its obli-
gation on its note
by issuing a further note seems to have
no effect upon the nature
or amount of the original obligation :
the original obligation is
met by a renewal, the Bank have only
gained time, not increased or
decreased an obligation which would
be measured just as before.
They have in fact done exactly what
the merchant has done; they
have paid in currency; and their
obligation is measured in the
same way. If they had an unrestricted
right of issuing notes their
obligation would not be altered: they
would still be liable to be
sued on default for the face value of the
note, but the effect of
the unrestricted power would presumably be
that the face value of
the note would have a much lower exchange
value than if there were
a restricted power : so that the Bank
would either have received
little value originally or the holder of the
note would
intermediately have suffered loss on the diminution of
the note
value. But in fact in the ordinary course of civilised
government,
as in Portugal, restrictions still continue. In the
present case
in 1925 the issue of notes by the Bank for commercial
purposes was
restricted to $195,000,000 of which they had issued
$64,000,000.
leaving a power to issue of $131,000,000. In addition,
the State
from time to time had authorised the Bank to issue notes
for State
purposes supporting these notes by a borrowing from the
the Bank
secured by State marketable bonds. Restrictions as to pro-
portions
of gold and securities reserves still continued in existence
so
far at any rate as the issue for commercial purposes was con-
cerned.
Let us assume, as might well have happened, that the
forged issue
instead of amounting to $100,000,000 had amounted to
$131,000,000
If the Bank had taken the same action they would
have issued
promissory notes to the full extent of their legal power.
[21] 3
4 [22]
entered into the head of such an
experienced lawyer as Wright, J.
Throughout his judgment he is
speaking of the liability of the
Bank on the notes, and he
finishes his judgment on this point by
these words: " They
say they were damaged by having to assume
" liability on
these notes without getting anything in return. I
" think
this argument is correct, and I think these notes must be
"
taken for this purpose at their face value just as they would be
"
if they had been issued by some other institution that is not a
"
bank of issue." I have already stated my grounds for
believing
this statement to be correct. For my part I cannot see
the way
to decide this case for Messrs. Waterlow without reversing
a number
of authorities which have governed our commercial law as
1 under-
stand it from earliest times.
[23] 5
1,098,822
The total amount recovered
from the con-
spirators is agreed at ... ... ...
... ... 488,430
The Bank's nett loss is therefore ... ... ... £610,392
[24]
Lord
Chan-
cellor.
Lord
Warring-
ton
of
Clyffe.
Lord
Atkin.
Lord
Russell of
Killowen.
Lord
Macmillan.
BANCO DE PORTUGAL
v
WATERLOW & SONS, LD.
and
WATERLOW & SONS, LD.
v
BANCO DE PORTUGAL
(Consolidated Appeals).
Lord Russell of Killowen.
MY LORDS,
I will start with the first
branch, which raises a problem both
novel and difficult.
The Bank's claim is simply this:—That having given 209,718
good notes in exchange for mere bits of paper, they have lost the face
value of each note so given in exchange. The loss of 500 escudos is,
according to the Bank, the inevitable consequence of the gift of the
note. The language in which this loss is expressed varies at
times. In paragraph 31 of the Bank's case here it is stated that :
" The Bank claim the value of the escudos which they had to part
" with for nothing." In paragraph 39 they say:—" The Bank
" paid out 104,859,000 escudos in exchange for unauthorised notes.
" At . . . . the then rate of exchange the sterling equivalent
" of this sum is £1,092,281." They treat the matter as though.
[25] 2
being the owners of assets worth
over a million sterling, they had
parted with those assets (or had
incurred an immediate liability to
part with assets of that value)
receiving nothing in return. There-
fore they claim that they did
in December, 1925, suffer, and have
now suffered, damage to that
amount.
3 [26]
only legal currency in Portugal.
The capital of the Bank was
13,500,000 escudos in fully paid
shares with limited liability.
There were two species of issue and
of notes in circulation, viz.,
one destined for the banking
operations of the Bank, the other
applied as loans to the
Treasury. The limit of the right of issue
for banking operations
was between 195 and 196 million escudos;
notes for this purpose
had in fact been issued to an amount between
64 and 65 million
escudos. leaving an unexhausted power of issue
to an amount of
about 131 million escudos. Notes issued on
Government account
amounted to 1,640 million escudos, so that the
total issue of
authorised notes amounted in December, 1925, to a
face value of
1,704 million escudos or thereabouts. The loans to
the Government
bore interest only at 1 per cent, per annum of which
5/8ths fell
to a sinking fund. None of the Bank's notes were payable
or
redeemable in gold or silver. A period of inconvertibility had
been
established in 1891 and was still continuing with no likelihood
of
its ever being determined. The only liability of the Bank, so
far
as concerns paying or redeeming a note when presented at the
Bank,
was to give in exchange for it another note or notes of
equivalent
face value. Each note when issued by the Bank became
in the hands
of the holder legal tender, and any such note if paid
to the Bank
by a debtor to the Bank must be accepted by the Bank
in discharge
pro tanto of the debt.
[27] 4
possession of that Bank, and the
same note in the possession of
another Bank or individual: a
belief which in terms emerges in
the judgments of Wright J. and
Greer L.J. and which underlies
the Bank's 16th reason.
What then was the obligation which the Bank incurred ?
5
[28]
what sum will it cost the
defendant to repair his breach, but what
loss has the plaintiff
sustained by reason of the defendant's breach
In many cases,
possibly in most cases, the answer to each question,
would be the
same sum. It would be the same here if Reason
No. 16 were true,
and if the Bank had really parted with
500 escudos with each note
issued in exchange for a Marang note. ;
[29] 6
of deciding that the Bank have
not proved that they have suffered
the enormous damages which they
claim to recover from Waterlows.
I confess, however, that I derive
some consolation from the know-
ledge that, in this alleged act of
violence I am abetted by one whose
pre-eminence as a commercial
lawyer is both well-established and
long established.
A majority of your Lordships,
however, think otherwise and are
of opinion that the Bank have
proved that in issuing a good note in
exchange for a Marang note
they suffered immediate damage to the
amount of 500 escudos.
Waterlows upon that footing are prima
facie liable to the Bank in
the sum of 104,859,000 escudos or (con-
verted into sterling at
the appropriate rate and date) £1,092,281.
This indeed would
appear to be something in the nature of a wind-
fall for the Bank;
for the introduction into a total issue of 1,704
million escudos
of less than 105 million bastard escudos will have
resulted in the
Bank recovering a sum amounting to more than seven
times their
paid up share capital.
[30]
The Lord
Chan-
cellor.
Lord
Warring-
ton
of
Clyffe.
Lord
Atkin.
Lord
Russell
of
Killowen.
Lord
Macmillan.
BANCO DE PORTUGAL
v.
WATERLOW & SONS, LIMITED
and
WATERLOW & SONS, LIMITED
v.
BANCO DE PORTUGAL.
Lord Macmillan.
MY LORDS,
[31] 2
the entire vitiated issue of 500
escudo Vasco da Gama notes in the
hands of the public and on their
presentation at the head office or
branches of the Bank to give
other notes in exchange for them. In
pursuance of this
notification the Bank honoured all the 500 escudo
Vasco da Gama
notes which were presented to it for exchange,
spurious and
genuine alike. That the withdrawal of the whole
issue was a
reasonable and indeed the only practicable step for the
Bank to
take in order to remedy the situation which had arisen was
hardly
contested by Messrs. Waterlow & Sons. They directed
their
criticism rather to the way in which the Bank carried out
its policy.
In the first place they argued that the Bank acted
precipitately and
that if it had delayed the announcement of the
withdrawal of the
notes for a short time the means of
discriminating between the
spurious and the genuine notes, which
admittedly the Bank did not
at first possess, would have been
available to it and it could have
refused to honour the
notes ascertained to be spurious. In the next
place they argued
that if the Bank had at first no alternative but to
honour
spurious and genuine notes alike by reason of its inability
to
distinguish between them, it should have ceased to honour
the
spurious notes whenever it had acquired or could have acquired
the
means of discrimination. Neither of these criticisms of the
Bank's
action is in my opinion warranted. The Bank in my view
was
justified in taking immediate action when it did, for the fact
of the
existence in the currency of a large number of spurious
notes became
a matter of public knowledge almost simultaneously
with its
discovery by the Bank and if a panic was to be averted
it
was essential to take action at once. I equally think that
having
properly announced the withdrawal of the notes and its
intention to
honour all such notes in the hands of the public, it
was not possible
for the Bank to alter its policy until a
reasonable time had been
given to the public to effect the
exchange. To have honoured the
spurious notes so long as it could
not tell them from the genuine
notes and then to cease to honour
them when it acquired or might
have acquired the means of
discrimination would have created a
second panic and such a course
of conduct on the part of the Bank
would have been, grossly
unfair. If the only way to avoid a panic
was to honour good and
bad notes alike, as I think in the circum-
stances it was, the
Bank's ability to distinguish between them
becomes an irrelevant
consideration. Moreover tlhe Bank was quite
unable to say with
regard to any particular spurious note presented
to it whether it
had not itself unwittingly reissued it into circula-
tion and so
become responsible for it.
I confess I am not disposed to
regard with much sympathy the
criticism which Messrs. Waterlow &
Sons have directed at the
Bank's action. Where the sufferer from a
breach of contract finds
himself in consequence of that breach
placed in a position of
embarrassment the measures which he may be
driven to adopt in
order to extricate himself ought not to be
weighed in nice scales at
the instance of the party whose breach
of contract has occasioned
the difficulty. It is often easy after
an emergency has passed to
criticise the steps which have been
taken to meet it, but such
criticism does not come well from those
who have themselves created
the emergency. The law is satisfied if
the party placed in a difficult
situation by reason of the breach
of a duty owed to him has acted
reasonably in the adoption of
remedial measures and he will not be
held disentitled to recover
the cost of such measures merely because
the party in breach can
suggest that other measures less burdensome
to him might have been
taken. On this part of the case I find
myself in agreement with
the reasoning of Scrutton, L.J. In my
opinion the action of the
Bank in honouring all notes of the type in
question, genuine and
spurious alike, between 7th December and
26th December, 1925. was
reasonable and justifiable in the circum-
stances and Messrs.
Waterlow & Sons ought to be held responsible
3 [32]
for whatever loss was occasioned
to the Bank by the adoption of that
policy. I have taken the 26th
of December as the limiting date, for
that was the date which the
Bank itself fixed and I think that it was
proper to specify a
time-limit for the presentation and exchange of
the notes. In so
far as the Bank voluntarily continued to honour
notes presented
after 26th December I am of opinion that it should
not be allowed
to lay the cost of doing so to the charge of Messrs.
Waterlow &
Sons.
[33] 4
purchasing power in terms of
commodities. It can be used by the
holder of it to purchase at
current prices any commodity, in the
market, including gold and
securities. It can equally be used by
the Bank to purchase
commodities, including gold and securities,
or to discharge debts
due by it. It must be accepted by the Bank
in discharge of debts
due to it. All this is quite irrespective of the
convertibility of
the note. With all respect to the contrary view it
is in my
opinion quite an irrelevant circumstance for the present
purpose
that the holder of a Bank of Portugal note is not entitled
to
demand for it from the Bank a fixed amount of gold. Gold after
all
is only a medium of exchange. Its special importance as such
arises
from its universal acceptability and the stability of its value.
A
bank of issue which undertakes to pay its notes in gold under-
takes
to give in exchange for them a commodity of universally
recognised
value and therefore a paper currency backed by gold
possesses a
high value in exchange; it is in effect as good as gold.
On the
other hand a paper currency which the bank issuing it does
not
undertake to pay in gold has necessarily a lower value in
exchange;
its purchasing power is not measurable in terms of a
universally
accepted standard, but depends on the credit of the
issuing bank.
In the present case the low value in exchange of the
500 escudo
note of the Bank of Portugal reflects its inconvertibility;
its
purchasing power is correspondingly diminished. The Bank
gets less
value for the notes which it issues than it would get if
they were
convertible in gold.
5 [34]
a large number of its notes are
issued to the Government in
exchange for Government paper on
unremunerative terms has for
its result that the assets on which
the paper currency of Portugal
is based are by so much the less
valuable as a basis of credit and
that the currency has a
correspondingly less value in exchange.
Messrs. Waterlow &
Sons get the benefit in the depreciated value
of the escudos they
have to pay.
I now proceed to work out the
practical result. The spurious
notes honoured by the Bank between
7th and 26th December
amounted to 207,706, which at 500 escudos
each gives a total of
103,853,000 escudos, equivalent, at 96
escudos to the pound sterling,
being the agreed current rate of
exchange at the time, to £1,081,802.
To this must be added
£6,541, being the cost of the genuine notes
rendered useless
by their withdrawal from circulation, bringing
out the total
liability of Messrs. Waterlow & Sons at £1,088,343.
The
Bank agreed that a claim of £2,381 which it had originally
made
for the cost of the good notes given in exchange for the
spurious
ones and which Wright J. took into account could not
receive
effect if the Bank was awarded the value of the spurious
notes.
For the sum of £1,088,343 the Bank would accordingly
be
entitled to judgment, were it not for the fact that it has
already
received from the liquidators of the Banco Angola e
Metropole,
the organisation set up by the conspirators for the
purpose of
utilising the spurious notes, a sum equivalent to
£413,430 and have
also estimated that they will receive from
this source a further sum
of £75,000, making in all
£488,430. A question has been raised as to
the manner in
which credit should be given for this sum. There
are various ways
in which it may be treated. (1) It may simply
be deducted from the
sum of £1,088,34.3 for which Messrs. Water-
low & Sons
are liable, leaving £599,913 as the sum for which judg-
ment
should be pronounced; (2) inasmuch as the Bank's total loss
(apart
from the cost of printing notes) amounted to £1,092,281,
being
the sterling equivalent of 209,718 spurious notes, and as
the
£488,430 represents a partial recovery against this sum,
a pro-
portion of the £488,430 in the ratio of 207,706
(being the number
of spurious notes in respect of which Messrs.
Waterlow & Sons
[35] 6
have been found liable) to
209,718 (being the total number of
spurious notes honoured), or in
other words 99.04 of the £488,430 or
£483,741 should
be deducted from the sum of £1,088,343, leaving
£604,602
as the sum for which judgment should be pronounced; or
(3) the sum
of £488,430 should be deducted from the Bank's total
loss of
£1,098,822 (being the loss on 209,718 spurious notes plus
the
cost of genuine notes rendered useless) leaving £610,392
and as
this sum is well within the total sum of £1,088,343
for which
Messrs. Waterlow & Sons are liable, judgment should
be pronounced
for £610,392. Messrs. Waterlow & Sons
contend for the first
method, Wright J. adopted the second, and
the Bank contend for
the third, quoting in support The
Morgengry and the Blackcock
[1900] P 1. The differences in
result are relatively unimportant
in view of the magnitude of the
sums involved and I have found
the question a troublesome one, but
I have come to the conclusion
that the third method is the right
one. Having recovered part of
their total loss from the
perpetrators of the fraud and having
established liability for
more than the balance of their total loss
against Messrs. Waterlow
& Sons the Bank is in my view entitled
to avail themselves of
Messrs. Waterlow & Sons' liability up to
the extent of the
balance of their total loss and so to secure from
the combined
sources complete indemnity.
I am accordingly in favour of
dismissing Messrs. Waterlow
& Sons' appeal, allowing the
Bank's appeal and directing judgment
to be pronounced against
Messrs. Waterlow & Sons for the sum of
£610.392.
(11824-44) Wt. 12O-27 14 5/32 P. St. G. 311