Restitution
front page

What's new?

Archive front page

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2007

2006

2008

2009

Yes, it is an interesting case. It is noted and supported by Donald Dugdale in (2004) NZ Business Law Review 294, who contends (as I understand him) that the court should have gone even further in limiting the claimant's rights - if he has a plausible claim, this will justify a temporary injunction and he should get one, rather than putting everyone at risk by merely signifying an objection.

Anyway, findings of Bank liability should be rare. He cites an early HL case, Gray v Johnston (1868) 3 HLC 1, as well as more recent authority indicating that banks are expected to trust their own customers.

It will be seen that the reasoning, both in the judgments and in the Case Note, assumes that the whole thing has to be settled in the world of contract. The starting point is not the bank's original receipt of the money (after all, it has been recycled through two acts of bona fide purchase between Bank and customer since then, before the Bank had any idea that anything was wrong). It is the Bank's duty to comply with the terms of its banking contract. Why?

The explanation seems to be that the case was one of "simple repatriation into the account from which the cheque was sourced" ([pars [13], [42]). But that doesn't change the origin of the money, or any equity that would attach to the customer's money when it was first paid into the bank, and continued to attach to it as it changed its form.

Be that as it may, having reached that point it is logical that the only thing which will discharge the Bank from its duty to its customer is if the Bank knows facts showing that it is participating in some dishonest action against a third party - the classic illegality defence to a contract. And the claimant who wants to stop the payment being made to the customer, stands liable (if he is wrong) to an action for wrongful interference with the contract between the Bank and its customer (paras [3], [6]).

To me, the other interesting thing is that in arranging the two payments the customer's manager appears to have had things to answer for. If his own company owned the money outright and had nothing to do with the claimant's operation (as he said when questioned by the bank) what business did he have tendering a bank cheque obtained with its funds, to the claimant's creditors? (See at para [57]) If this were a matter of property protection, a defence which smells of "I knew he was swindling someone, but I was mistaken about who it was" doesn't normally have much appeal. Here, the bank was expected to place a considerable degree of trust in its own customer, assuming contrition rather than some new wrongdoing.

So the court's response here was markedly different from what we have seen elsewhere. What is it about this case which put it into the world of contract? Why does it not belong in (1) the world of restitution (eg, money paid to a bank by mistake, where the bank must advance the "ministerial receipt" defence, which is defeated by notice of the claim); or (2) the world of property and tracing?

If (as it appears) there is no good ground for distinction, well then should not all cases of bank receipt be evaluated solely by reference to the world of contract? The bank's receipt of the money is never gratuitous. The receipt is part of a transaction which is transformed almost immediately into an obligation in debt to the customer, with an attendant duty to repay the money on demand. The customer's strong reliance interest leaves no room for squeamishness about the source of the money. So perhaps the Bank has a bona fide purchaser defence from the outset, with only such limitations on repayment as are envisaged in IML v Nat Bank? Is this the answer to Lionel's concerns?

Richard

Here is a case from last year which might spark some discussion: US International Marketing Ltd v. National Bank of NZ, [2004] 1 NZLR 589 (CA). The plaintiff had two bank accounts with the defendant. One fine day it bought a bank cheque for $15,000 payable to the High Court, in order to try to stop the liquidation of another company, P Ltd. Although these funds were tendered through counsel, P Ltd. went into liquidation anyway so the cheque was not paid into court. The plaintiff re-negotiated the cheque back into the same account from which funds had been withdrawn to purchase it. The next day, P Ltd by its lawyers wrote to the bank claiming that the funds previously embodied in the cheque belonged to P Ltd and asking the bank to freeze the funds pending P Ltd's attempt to get an injunction. Principals of the plaintiff found that they could not operate either of the plaintiff's accounts. Finally the plaintiff sent a letter to the bank indicating that a business opportunity overseas would be lost if the plaintiff could not access $10,000 from its account, and the plaintiff would hold the bank liable for such losses if the accounts were not unfrozen. The bank stood its ground and refused to pay. Later that day the court order was indeed made, and the bank paid the money into court. The order was discharged some months later. Now the plaintiff sued the bank for breach of the banking contract, for its refusal to pay on demand, claiming consequential losses of $731,000. The bank defended on the ground that it did not have to pay if paying would put it in jeopardy of being a dishonest assistant in a breach of trust. Held that the bank was in breach of contract and should have paid (the quantum of liability was separated by consent and the court seems to have had some doubts about the lost business opportunity). A banker would be justified in refusing to pay its customer only if to do so would be dishonest (with the additional reference by Tipping J to the idea of whether it would appear dishonest to a reasonable banker).

Note that the Lexis version does not seem to mark where the judgments begin and end. Tipping J is [1]-[22]; Anderson J is [23]-[76]; Glazebrook J is [77]-[79]. The CA has refused leave to appeal to the PC - I don't know whether the PC can itself be asked for leave to appeal?

Is it right, and if so does it square with strict liability plus defence of change of position for banks who receive trust money? The bank clearly knew that P Ltd might later establish that the money was held in trust for it by the plaintiff, and might well have been aware that there is support for strict liability for receipt of trust property, mitigated by defences. But could the bank have pleaded change of position if it had paid out in full knowledge of the pending claim? The court's decision that the bank had to pay seems to turn largely on the holding that an honest bank is not in danger of liability to the 3d party (P Ltd) under dishonest assistance. There was some mention in the bank's submissions of liability for receipt, but if the bank's liability there were strict, it seems much harder to require the bank to pay its customer and cross its fingers that such payment will give it a defence. The best hope would be to argue that the bank never received the $15,000 at all, since it went into a bank account in credit; but that is a difficult and contested bit of law.

 

Lionel