Smith and Another v Lloyds TSB Bank Plc;Harvey Jones Ltd v Woolwich Plc
| Jurisdiction | England & Wales |
| Judge | Sir Murray Stuart-Smith |
| Judgment Date | 27 July 2000 |
| Judgment citation (vLex) | [2000] EWCA Civ J0727-2 |
| Docket Number | 1999/0975/B2 |
| Court | Court of Appeal (Civil Division) |
| Date | 27 July 2000 |
[2000] EWCA Civ J0727-2
Lord Justice Pill
Lord Justice Potter and
Sir Murray Stuart-smith
1999/0975/B2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
(MR JUSTICE BLOEFELD)
&CENTRAL LONDON COUNTY COURT
(HIS HONOUR JUDGE HALLGARTEN)
ON APPEAL FROM THE QUEENS BENCH DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Ms. M Simmons QC and Ms S Tolaney (instructed by Messrs Berrymans Lace Mawer, London EC2) appeared for the Appellants Roger Smith & Christopher Hayward
Mr M Hopgood QC and Mr A Pelling (instructed by Messrs Dibb Lupton Alsop, London EC2) appeared for Lloyds TSB Bank plc
Mr D Wolfson (ionstructed by Messrs Thomas Eggar Church Adams, London WC1) appeared for Woolwich plc
Mr R Slade (instructed by Messrs Gersten & Nixon, London W1) appeared for Harvey Jones Ltd
Pill LJ:
These appeals raise questions as to the possible liabilities in conversion of a bank to the true owner of a cheque or bankers draft for the full value of the instrument where the instrument has been fraudulently altered by the deletion of the name of the true payee and substitution of the name of a false payee prior to collection and payment. In Smith v Lloyds TSB Bank plc ("the Lloyds action"), the claimants appeal against the decision of Mr Justice Blofeld, dated 29 June 1999, whereby it was ordered, following the hearing of a preliminary issue of law, that the claimant was entitled to no more than nominal damages for the conversion by Lloyds, as the collecting bank, of a cheque which had been fraudulently altered. In Harvey Jones Ltd v Woolwich plc ("the Woolwich action"), the bank appeal against a decision of His Honour Judge Hallgarten QC, dated 8 June 1999, whereby it was ordered that the true owner of a bankers draft was entitled to damages in conversion for the full face value of a fraudulently altered draft which had been converted by them as paying bank. In each case, the bank relied upon section 64 of the Bills of Exchange Act 1882 ("the 1882 Act").
The Lloyds action
The claimants are Joint Liquidators of ILG Travel Limited, a company in creditors' voluntary winding up. By the Insolvency Regulations 1994, monies received or paid out in the course of a creditor's voluntary liquidation are routed through the Insolvency Services Account ("The Account") held by the Department of Trade and Industry ("DTI") with the Bank of England. Monies in the account are held by the DTI as trustees for those entitled to them, including the Liquidator and unsecured creditors. In the case of a voluntary winding up, where the Liquidator requires to make a payment in respect of the expenses of the winding-up, he may apply to the Secretary of the State, who may authorise payment to the Liquidator or direct the issue to the Liquidator of a payment instrument for delivery to the person to whom the payment is made. On 19 September 1996 the claimants applied to the Insolvency Service for the issue of a cheque for £127,240.30 payable to the Inland Revenue. On 23 September 1996 there was drawn on the Account a cheque dated 26 September 1996 in that sum payable to the Inland Revenue. The cheque was crossed "A/C Payee Only" and the claimants received it on 25 September 1996. Shortly afterwards the cheque was stolen from the claimants' offices and the name of the payee was fraudulently altered by deleting the words "Inland Revenue" and inserting the name "Joseph Smitherman". The cheque was then fraudulently paid into an account in the name Smitherman at Lloyds' Southsea Branch and was cleared on 17 October 1996, before the claimants discovered the loss of the cheque. When the Insolvency Service was informed of the loss, payment had already been made by the Bank of England. The claimants sue Lloyds, the collecting bank.
The Woolwich action
The claimants, who were manufacturers and suppliers of kitchen units, were the holders and payees of a draft dated 9 August 1996 issued by Woolwich and drawn on their corporate account in the sum of £7,222.80. It was issued by Woolwich at the request of their customers, Brian Easter and Jane Tucker, in order to meet a debt owed to the claimants for kitchen units, the customers' account being debited accordingly. On or about 14 August 1996 the draft was stolen from the claimants' premises and presented by an unknown third party to the Kennington Branch of National Westminster Bank Plc ("Nat West") with the claimants' name altered to "Edmund C.A. Owusu-Sekyere", such presentation being made for collection to an account in that name. Nat West presented the altered draft to Woolwich for payment to that account. Woolwich took possession of it and paid £7,222.80 to Nat West in purported discharge of the draft. Prior to that act, Woolwich would at the request either of the claimants or of Brian Easter and Jane Tucker, have supplied the claimants with a replacement draft in the sum of £7,222.80. The claimants sue Woolwich, the paying bank.
The Statute
Section 64(1) of the 1882 Act provides:
"Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorised, or assented to the alteration, and subsequent endorsers.
Provided that,
Where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenour."
By virtue of section 73 of the 1882 Act, a cheque is a bill of exchange drawn on a banker payable on demand. The 1882 Act, supplemented by the Cheques Act 1957 and the Cheques Act 1992, regulates the rights and liabilities of the parties to a cheque and of banks who collect and pay cheques. Section 80 of the 1882 Act protects a bank which in good faith and without negligence pays a crossed cheque drawn on it to another bank. Section 4 of the Cheques Act 1957 is the counterpart of section 80 and protects a collecting bank which acts in good faith and without negligence. Section 81A of the 1882 Act, inserted by the Cheques Act 1992, section 1, provides that where a cheque is crossed and bears across its face the words "account payee" or "a/c payee" either with or without the word "only", the cheque shall not be transferable, but shall only be valid as between the parties thereto. Prior to its enactment, a person who stole a cheque which was a negotiable instrument could obtain the proceeds by forging an indorsement in the name of the true payee and paying the cheque into an account in the name of the endorsee or, in the case of a general indorsement, into any account. The effect of section 81A is to make a cheque crossed "account payee", as the cheque in the Lloyds action was, not only not negotiable but also not transferable.
That fraud prevention measure, so described by Mr Hapgood QC on behalf of Lloyds, requiring the cheque to be paid into an account in the name of the payee, may be circumvented if a cheque is altered, the alteration not being apparent, by erasing the name of the true payee and substituting the name of a different payee in whose name an account has been opened. The name may of course be that of a rogue purporting to be the payee.
The common ground and the issues
The issues in these appeals are narrowed by the common ground which exists:
(1) Authority binding on this court establishes that both a collecting bank and a paying bank may in certain circumstances be liable in the tort of conversion by collecting or paying a cheque for or to someone other than the true owner.
(2) In both appeals, the banks accept that they converted the relevant piece of paper.
(3) Section 80 of the 1882 Act does not protect a bank which pays on a forged instrument, for example a cheque on which the signature of the drawer has been forged, or an instrument which was once valid but has been avoided by material alteration. The paying bank is not entitled to debit its customer and bears the loss itself.
(4) Both the alteration to the name of the payee on the cheque in the Lloyds action and the draft in the Woolwich action were "material alterations" within the meaning of section 64 of the 1882 Act.
(5) In these appeals, no party comes within the exception in or the proviso to section 64(1) of the 1882 Act.
(6) Neither alteration was apparent on the face of the document and the failure of the bank to recognise the change in name was not in either case negligent.
In each case, it was alleged that the bank had converted the claimant's cheque. In the Lloyds action, the claim was also based on money had and received. Blofeld J recorded that it was accepted that no separate issue of law arose on that claim. At that stage the claim was kept open on the facts but the complainants now concede that, on the facts of this case, there is no claim for money had and received.
I accept Mr Hapgood's formulation of the main issue in the appeals:
"Where a cheque or bankers draft is fraudulently altered by deleting the name of the true payee and substituting the name of a different payee, and the cheque or draft is then collected and paid, is the paying bank and/or the collecting bank liable in conversion for the full value of the instrument, or is the measure of damage nominal on the ground that the material alteration renders the instrument a nullity by virtue of section 64 of the 1882 Act?"
Conversion is an...
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