Royal Courts of
Justice
Strand
London WC2A 2LL
Friday, 23rd November 2001
B e f o r e:
__________
Claimant/Appellant
-v-
Defendant/Respondent
__________
MR JAMES QUIRKE (Instructed by
Eaton Ryan & Taylor, Lombard House, 145 Great Charles Street, Birmingham,
B3 3LP) appeared on behalf of the Appellant.
MR IAN WILSON (Instructed by Martineau Johnson, 78 Cannon Street, London, EC4N
6NQ) appeared on behalf of the Respondent.
__________
1. I will ask Longmore LJ to give the first judgment.
2. If a bank credits its customer's account by mistake, the bank may be entitled to reverse that entry unless the customer has changed his position in reliance on the entry being made. It is agreed in the present case that the customer, here Mr Pearce, did change his position by, inter alia, incurring liability for VAT on a transaction made after the wrong entry had been entered into his account and after the bank had confirmed to him that the money was available. Before the wrong entry, the account was in substantial overdraft. Once the wrong entry was made the account went into credit; but if the bank were entitled to correct the wrong entry, the overdraft would have re-emerged. The judge in this case has held that the customer's change of position prevents the bank from claiming that the wrong entry could be reversed. She has, however, held that the amount of the VAT incurred is to be setoff against the bank's claim in respect of the overdraft. The customer says he is entitled to treat his account as being in credit until such time as he actually pays the VAT to the Customs, so that the bank's claim on its overdraft should fail.
3. The basic facts of the matter are these. The claimant, Mr Pearce, used to trade in gold and jewellery in Birmingham's jewellery quarter. He was in a small way of business and had an agreement with his bank for an overdraft limit of £10,000. In April 1995 he was utilising that overdraft limit. It was at this time that he met a fraudster whom he knew as "Mr Martin".
4. Mr Martin arranged with the claimant that he, Martin, would buy an amount of gold from him. The claimant agreed to provide the gold but only as and when Martin ensured that cleared funds were put into the claimant's bank account with Lloyd's Bank at Great Hampton Street in Birmingham. Both the claimant and the intended victim of the fraud, Goodwin's of Hanley, had bank accounts with Lloyd's Bank. But Goodwin's account was at the Lloyd's Branch in Hanley near Stoke-on-Trent.
5. At about the same time, viz the week beginning Monday 24 April 1995, Martin, or possibly a confederate of his, made telephone calls to Lloyd's Bank at Hanley. He pretended to be John Goodwin, the managing director of Goodwin's of Hanley Ltd, a local manufacturer in Hanley. He purported to arrange the transfer of a total of £375,897 by five separate transfers from the account of Goodwin's, but all these transfer were forgeries. For the purpose of this case the relevant transfer request was dated Wednesday 26th April 1995 and delivered to the Hanley branch on that day in the sum of £88,385.50 in favour of the claimant. Telephone calls made on Monday 24 April and Tuesday 25 April had apparently been so "very friendly" and "chatty" that the relevant member of staff at the operation manager's assistant's desk thought, wrongly, that the bank had spoken to the customer to confirm back the details of the payment. Accordingly no telephone call was made to Goodwin's of Hanley to confirm the detail of the transfer.
6. Pursuant to the clearing house automated payment system, known to the initiated as CHAPS, the relevant funds were transferred to the claimant's account at the Great Hampton Street branch of Lloyd's Bank in the jewellery quarter in Birmingham on the morning of 26 April. The claimant, after confirmation by the bank of the transfer, paid a dealer a total of £76,497 for gold on 26 and 27 April 1995 which he then supplied to Martin at a price of £88,385.50. The claimant had already paid some VAT to his gold supplier, and, by a practice which is peculiar to the jewellery trade, was bound to pay a further sum in due course to the Customs and Excise on his own account in respect of the gold which he had purchased. The crediting of the amount of the forged transfer put Mr Pearce's account into credit and, indeed, it stayed in credit even after he had paid the dealer.
7. At about the same time as the delivery of the gold to Martin, on the afternoon of 27 April, Lloyd's Bank in Hanley became aware that the original transfer was a forgery. The local manager at Hanley, a Mr Knight, telephoned Goodwin's of Hanley and discovered that they had no knowledge of any of the transactions. He immediately telephoned the Great Hampton Street branch of Lloyd's Bank in Birmingham. From that branch the business banking manager went to see Mr Pearce but was too late to prevent the delivery of the gold by Mr Pearce to Martin. Martin has since disappeared. Lloyd's Bank has, of course, reimbursed Goodwin's of Hanley Ltd for sums wrongly debited from their account pursuant to the forged transfer instructions.
8. Lloyd's Bank originally seem to have accepted that they could not recover the full sum of £88,385.50 which they had mistakenly credited to the claimant, since he had paid the sum of £76,497 to his dealer. But that left the sum of £11,888.50, and on 1 May 1995 the defendant bank purported to recover that sum by debiting the claimant's current account. That debit put the claimant's account back into overdraft on the bank's books, and at the end of that day his account had a debit entry of £11,629,79.
9. The claimant did not agree with, or submit to, that debit. But, as I have said, he did have an overdraft limit with his bank of £10,000. After 1 May Lloyd's Bank did charge some monthly unauthorised borrowing fees of £7.00 on the overdraft. The claimant paid into his account a total of £2,893 in July 1995, but thereafter the account was substantially unused except for the accumulation of interest charges, service charges, unauthorised borrowing charges and insurance premiums in respect of a policy protecting the overdraft in the event of the death of the claimant. In the circumstances the claimant did not feel able to trade out of his liabilities. He informally liquidated his stock and repaid his creditors as far as possible. He was in due course made bankrupt; but we were informed this morning that he has now in fact paid the VAT to Customs and his bankruptcy has been annulled.
10. The liability to Customs for VAT however did remain outstanding. The Customs served two statutory demands on the claimant, but have held off further enforcement awaiting the outcome of this case. They have not imposed penalties or interest, and the liability of Mr Pearce to Customs is now agreed between the parties in the figure of £11,052.08. As I have said, that sum has in fact been paid on a date between the date of the judge's judgment and the appeal which we are hearing.
11. In correspondence, Mr Pearce asserted that the deduction of £11,888.50 from his account was wrongful. The bank asserted its right to repayment of the overdraft together with interest and appropriate charges, and later it asserted it was entitled to recover the full sum which had been wrongly credited, including the amounts that had been paid out to the dealer for the gold.
12. In February 1999 Mr Pearce brought proceedings and claimed:
(1) a declaration that the bank was not entitled to recover any part of the £88,385.50 credited to the claimant's bank account as a result of the fraud;
(2) a declaration that the bank was not entitled to deduct £11,888.50 on 1 May 1995 from his current account;
(3) a declaration that the bank was not entitled to recover capital and interest on the current account;
(4) an order that the bank repay £11,888.50 to the claimant;
(5) damages for wrongful deduction of the sum of £11,888.50 and for breach of contract.
13. The bank counterclaimed on 24 March 1999 for:
(1) restitution of the amount of £76,497 as money had and received;
(2) repayment of the overdraft on the account resulting from the debit of 1 May 1995 in the sum of £14,982 together with interest as from 24 March 1999; and
(3) interest on both of the above.
14. The case was tried by Her Honour Judge Caroline Alton in the Birmingham Mercantile Court on 5 and 6 June 2000. She delivered judgment on 6 June. She found, inter alia, that the defence of change of position to the claim of the bank for restitution had been made out, and there is no appeal against that conclusion. The case was adjourned to 1 December 2000 when further argument took place on the nature of the order to be made. By that stage it had been agreed that the sum payable for VAT was £11,052.08 and that, since that took most of the amount debited to the claimant by the bank, that sum would have to be the bank's responsibility. There was dispute whether there should be a re-credit made as at 1 May 1995, with the result that the claimant's account should not be treated as going into overdraft, or whether it should be set off after the bank's own claim in respect of the overdraft and associated charges had been calculated. The judge decided that the latter was the correct course, because otherwise the claimant would get the benefit of not having paid the VAT over a period of five years when, but for the mistaken payment, he would in fact have been running a substantial overdraft on which the bank would have been entitled to claim interest and charges in the ordinary way.
15. The judge approached the matter by considering what would have happened if the mistaken payment to the claimant had been put in a separate account and the money due to the dealer and for VAT had been taken out of that account. That account would then have been almost entirely exhausted since the overall profit on the deal was virtually nil. The liability on the first account with its overdraft would then have remained.
16. I should read one or two passages from her judgments in order that the flavour of the judgment may be understood. I start at page 23 between A-B:
On the facts of this case and on the transaction as Mr Pearce says it was, the profit element was relatively small and would not have had the effect of significantly reducing the overdraft, nor, indeed, has it ever been suggested that Mr Pearce's intention or objective behind this deal was to make a sufficient profit to write off his overdraft. That simply could never have been done.
Accordingly, if the court simply declared that the deduction of £11,000 was unlawful or unauthorised and when dealing with the counterclaim, treats the account as in credit, or virtually so, from the 27th April on the basis that Mr Pearce had the VAT liability in substitution for the overdraft, and hence the bank was not entitled to do what it did, then it seems to me that Mr Pearce would be placed in a better position than he would have been in either had the fraud not occurred at all or had the transaction been legitimate and proceeded as planned. Indeed, the bank, as the other innocent party, would be required not simply to bear the loss of the monies mistakenly credited and paid away but also, effectively, Mr Pearce's costs of the deal.
17. Then at page 25, again between A-B:
So one goes back to the 27th May and 1st May and asks oneself: if the bank at that time had said, `Well, look, we will deduct the £11,800, representing the amount which you have not paid out yet but we will the hold £10,000 of that in a suspense account for you and if it turns out that you need to discharge a VAT liability, then it can be discharged out of that suspense account but it will not be available for any other purpose', then I do not see for a moment how the bank could have been criticised. The change of position, so far as the VAT liability is concerned, would not, as I have said, mean that the funds became part of Mr Pearce's general funds. It was not his money, but it was money which he did not have to repay to the extent that, in due course, he would be required to defray a liability.
18. The judge revisited the matter in a second judgment of 1 December 2000. Again I should quote two passages from that. First, at page 3, line 7:
If the purpose of this court is to ensure that Mr Pearce is entitled, in respect of a liability where there was actually no true available fund beyond the potential borrowing that he would have to make, if one is to try to ensure that he does not lose out as a consequence of his assumption of the VAT liability, it seems to me that it is best and most appropriately dealt with by dealing with it on the basis of the No.1 and No.2 account approach; otherwise if Mr Pearce is entitled to say, `Look, the amount of money mistakenly paid over should be credited to my overdrawn account so as to eliminate my obligation to pay interest on that, even though at that stage I have not actually paid out the VAT', and indeed (as it has turned out) he does not do so for years, the reality is that he could end up better off.
19. Then at page 55 line 14:
What seems to me ought to be the approach here, and it is consistent with my previous judgment on the matter, is this. Mr Pearce is entitled to a declaration that the bank are not entitled to recovery of the £76,000-odd initially expended. He is also entitled to a declaration that the bank is liable to indemnify him in respect of the liability assumed by him in respect of the VAT.
20. In accordance with those reasons for judgment, a final order was in due course drawn up relevantly in the following terms:
IT IS DECLARED THAT:
1.The Defendant is not entitled to repayment of £76,497 expended by the Claimant in reliance upon the Defendant's mistaken payment.
2.The Defendant is liable to indemnify the Claimant in respect of his liability for VAT resulting from the mistaken payment in the sum of £11,052.08.
AND IT IS ORDERED THAT
3.There be judgment for the Defendant upon the Counterclaim in the sum of £16,474.34 [being the Claimant's current account as reconstructed so that the account is taken at the commencement of business on 1 May 1995 to be in debit in sum of £10,865.44 with interest calculated on the reconstructed account up and to including 7 June 2000 (`the Reconstructed Balance')]
4. The liability of the Defendant pursuant to paragraph 2 above be discharged by the deduction from the Reconstructed Balance of £11,052.08.
5. The Claimant's claims and the Defendant's counterclaims be otherwise dismissed.
21. Mr Quirke (on behalf of Mr Pearce) submitted that the effect of the judge's first decision on 6 June was that there was no entitlement on the part of the bank to debit the sum of £11,880.50 on 1 May and that Mr Pearce's account should be re-credited with that sum on that date. The result of that, in Mr Quirke's submission, would be that the account would not have gone back into overdraft and the claim by the bank on the overdraft must therefore fail. He categorised the overdraft which arose as a result of the wrongful debit entry on 1 May as unwanted and foisted on Mr Pearce without any request for it being made.
22. That solution to the case was put to the judge on the argument about her final order, but it did not appeal to her for the reasons that she set out and part of which I have read.
23. Mr Wilson for Lloyd's Bank submitted that Mr Pearce's existing overdraft had never come to an end and would have continued if the fraudulent transaction had never occurred. He submitted further, with some assistance from my Lord, Lord Justice Chadwick, that there was nothing inequitable in Lloyd's Bank, as Mr Pearce's bank and the recipient of the forged transfer form, reversing the entry of £11,888.50 or, perhaps more accurately, the entire entry of £88,385.50 to the extent of the remaining £11,888.50 in Mr Pearce's account, provided that the bank accepted that it would honour any cheque drawn in respect of VAT in the sum of £11,052.88. That was effectively what the judge had done in paragraph 2 of her order, which required the bank to indemnify Mr Pearce in respect of liability for VAT in that very sum.
24. In my judgment Mr Wilson's submissions are correct. I say that for two reasons. First, as at 24 April Mr Pearce did have an overdraft in the sum of £10,865.44. He ought to be in no better position as a result of the fraudulent transaction. If there had been no such transaction, the overdraft would have remained; and it is only right and proper that the bank should be entitled to recover that. Mr Quirke's assertion that the overdraft was foisted on Mr Pearce against his will is contrary to the facts of the case, since before the fraud he needed, requested and did have an overdraft which he utilised to the full. It was necessary for the judge's order to reflect that, as it does in paragraph 3. Second, even if, as Mr Quirke submits, Mr Pearce's account were to be re-credited as at 1 May so that there was then no overdraft, that does not help Mr Pearce. The reason why the bank was not entitled to debit the sum of £11,888.50 on 1 May 1995, in respect of its crossclaim for money wrongly credited, was that the claimant had changed his position, not just because of the £76,497 he had paid to his dealer, but also because he had incurred a VAT liability. If the incurring of VAT liability is to be held to constitute a change of position, it must be assumed that the liability is in fact discharged. Otherwise, the claimant's position cannot be said to have truly changed. Indeed, Mr Pearce asserts that he would have paid VAT at the end of May 1995 but for the bank's wrongful debiting: see page 21 of the judgment. That again needed to be reflected in the judge's order, and it was so reflected in paragraph 2, providing for the bank to indemnify Mr Pearce in respect of the sums for VAT which have now been paid.
25. This case has been somewhat bedevilled by the fact that the bank put its crossclaim on the basis of recovery of money paid under a mistake of fact. If that is a correct categorisation of its claim, the defence of change of position is, of course, relevant. Mr Quirke submitted that the crossclaim was in fact rightly put in that way at the suit of Lloyd's Bank Hanley. But any claim by Lloyd's Bank Hanley is, in my judgment, more properly made against Lloyd's Bank Birmingham, not against Lloyd's Bank Birmingham's customer, Mr Pearce. The correct claim against Mr Pearce was for Lloyd's Bank, Birmingham to reverse the entries in his account as not showing the true position. That could be done, in my judgment, but only on terms that Lloyd's Bank accepted liability for VAT.
26. That is what the Bank has done as a result of the judge's order and, in my view, this appeal should be dismissed.
27. I agree. The appellant, Mr Keith Pearce, maintained an account with Lloyd's Bank at its branch at Great Hampton Street, Birmingham, for the purpose of his trade as a jeweller. At the close of business on 25 April 1995 that account was overdrawn in the amount of £10,879.44. On 26 April 1995 the bank credited the sum of £88,385.50 to the account. It did so in the belief that that sum was to be transferred from the account of another customer of the bank, Goodwin's of Hanley, with the authority of that customer. The effect of that credit was to bring Mr Pearce's account into credit in the amount of £77,506.06.
28. On receiving confirmation from the bank that cleared funds had been received, Mr Pearce entered into two transactions for the purchase of gold bullion. The first transmission was in an amount of £20,000 in cash, including VAT. The second was a purchase from a bullion dealer, Cooksons, in the amount of £56,497, excluding VAT. It is common ground that - in connection with the purchase of gold from Cooksons - Mr Pearce incurred a liability to make a payment in respect of VAT direct to the Customs and Excise. That liability arose under arrangements peculiar to the jewellery and bullion trade. The amount of that liability has been agreed at £11,052.08, although precisely how that sum is made up has not become clear. Whatever else it may be it is not the VAT payable at 17.5% on a supply for £56,497.
29. On the following day, 27 April 1995, the bank made two debits to Mr Pearce's account, in order to fund the gold bullion purchases which he had made. Those were (i) a debit of £20,000 in respect of cash withdrawn and (ii) a debit of £56,497 by way of transfer to Cooksons. There were three other small debits on that day amounting to £738.00 in total. The effect of those debits was to reduce the balance on the account to £382.06.
30. The bank discovered, almost immediately, that the transfer of £88,385.50 made from the account of its customer, Goodwin's of Hanley, was unauthorised. Mr Pearce, the bank and Goodwins had been victims of a fraud in the circumstances which Longmore LJ has described. But the bank did not seek to reverse the whole of the credit to Mr Pearce's account derived from that transfer. The bank recognised that £76,497.00 had been laid out by Mr Pearce in the two purchases of bullion in reliance on the belief that there were cleared funds in his account to meet those drawings. On 1 May 1995 the bank debited Mr Pearce's account with the difference between £88,385.50 and £76,497 - that is to say, with the amount of £11,888.50. The effect was to put the account back into overdraft in the amount of £11,506.44.
31. The issue on this appeal is whether the bank was entitled to make that debit of £11,888.50 on 1 May 1995; and, if so, on what terms. In my view the bank was so entitled. The position was that Mr Pearce's account had been credited with an amount, £88,385.50, which, on a true understanding of the facts should not have been transferred. That is not to suggest any fault at all on the part of Mr Pearce. It is simply to recognise that, as a result of the fraud perpetrated on Mr Pearce, the bank and Goodwin's of Hanley, the transfer from the account of Goodwin's of Hanley was not authorised. The bank had acted under a mistake. Its mistake was to think that it had authority to make the transfer when it did not in fact have that authority.
32. The question, therefore, is whether, and if so on what terms, the bank was entitled to be relieved of the consequences of that mistake. The judge held, rightly in my view, that the bank was not entitled to be relieved of the consequences of the mistake to the extent that Mr Pearce had altered his position in reliance on the assurance that cleared funds were available to meet his purchases of gold bullion. That is why the bank did not - and was not entitled to - reverse the entry of £88,385.50. It could not reverse that entry without making the two payments, totalling £76,497.00, in respect of Mr Pearce's purchases. But there was no reason why it should not reverse the entry in respect of the balance, £11,888.50. That money had not been paid out of the account or expended. But the bank had to recognise that, as part of the transactions into which Mr Pearce had entered, he had exposed himself to the liability to pay or account for £11,052.08 to the Customs and Excise. When and if he was required to pay that sum to the Customs and Excise, the bank were, in my view, obliged to make that payment also. That is the effect of the order which the judge has made. Now that Mr Pearce has made a payment of £11,052.08 to Customs & Excise, he can recover it from the bank. But that does not lead to the conclusion that the bank was not entitled to make the debit entry of £11,888.50 which it did make on 1 May 1995.
33. For those reasons, I too would dismiss this appeal.
34. I agree with both judgments.
Order: Appeal dismissed.