Universal Import Export GmbH v Bank of Scotland
| Jurisdiction | Scotland |
| Judgment Date | 28 October 1994 |
| Date | 28 October 1994 |
| Docket Number | No 13 |
| Court | Court of Session (Inner House - Second Division) |
SECOND DIVISION
Lord Marnoch
Bank Bills of Exchange Contract Misrepresentation Fraudulent misrepresentation Bank draft delivered by buyer of goods to seller in payment of price Funds held by buyer to cover draft obtained by fraud with seller and bank ignorant of fraud Whether bank bound to pay the sum in draft to seller Whether draft represented illegal payment of proceeds of crime Whether contrary to public policy to pay on draft Whether exception to normal rules respecting payment in relation to bill of exchange Bills of Exchange Act 1882 (45 & 46 vict, cap 61), secs 3, 5, 47 and 881
As a result of a contract of sale the buyers delivered a bank draft issued by a bank to the sellers, in which the sellers were named as payees. The bank refused to pay on the draft. The sellers thereafter raised an action for payment. In their defences, the bank contended that the issuing of the draft was induced by the fraudulent misrepresentation of the buyers and that the draft was intended to serve an illegal purpose by those parties. The lodging of the funds had been part of a fraudulent scheme by the buyers to attempt to disguise the fact that the funds had been obtained by fraud. The Lord Ordinary (Marnoch) held that the fraud did not affect the bank's obligations to the sellers and that the bank was contractually bound to make payment to the payee. The bank reclaimed.
Held (aff judgment of Lord Marnoch) (1) that, as parties agreed that the draft contained a contractual undertaking by the bank to pay the sum specified in it, the critical question was whether in the circumstances the bank were entitled to refuse payment under that contractual obligation because of the suspicion of fraud on the part of the buyers who were a third party to the contract; (2) that the general rule was that the fraud of the third party did not give grounds for avoidance of the contract by one of the contracting parties and there was no exception to that rule where the contract in question, as here, involved a negotiable instrument; (3) that the contract between the bank and the sellers had been a genuine commercial transaction and not apactum illicitum and payment by the bank draft would not constitute part of the fraudulent scheme for the bank, by issuing the draft, had undertaken to make payment of the sum specified in the draft using its own funds and the draft did not involve any of the funds which the bank maintained were derived
from embezzlement or money laundering; (4) that that being the case, the court was merely deciding which innocent person had to bear the potential loss arising from the criminal activity which had taken place; and (5) that there being no dispute that the draft was issued in respect of a genuine transaction, the draft being issued by the bank in order to settle an existing debt, and the sellers agreeing to accept a draft in settlement of that debt, it was plain that the bank draft had been given for full consideration; and reclaiming motion refusedAuthorities considered.
Opinion (per Lord Morison) that where pursuers aver that they had entered into a genuine commercial contract in respect of which consideration had been agreed at arms length and which ex facie did not appear to be unreasonable in amount, theonus or proving they had received some gratuitous benefit from that contract should lie with the person asserting that.
Universal Import Export GmbH brought an action of payment against the Governor and Company of the Bank of Scotland in respect of the failure by the bank to pay on a bank draft issued by and drawn upon them in which the pursuers were payees. Maus Freres SA entered the process as minuters. The averments of parties appear sufficiently from the opinions of their Lordships in the Inner House.
The cause called in procedure roll before the Lord Ordinary (Marnoch) on parties' preliminary pleas in law.
At advising, on 30 June 1994, the Lord Ordinary sustained the pleas in law for the pursuers, repelled the pleas in law for the defenders and minuters and granted decree de plano.
The defenders and minuters reclaimed.
Cases referred to:
Anns v Merton London Borough CouncilELR [1978] AC 728
Bank fr Gemeinwirtschaft Aktiengesellschaft v City of London Garages LtdWLR [1971] 1 WLR 149
Barclays Bank Ltd v W F Simms Son & Cooke (Southern) LtdELR [1980] 1 QB 677
Boissevain v WeilELR [1950] AC 327
Burns v EdmanELR [1970] 2 QB 541
Clydesdale Bank v PaulUNK (1877) 4 R 626
Geismar v Sun Alliance and London Insurance LtdELR [1978] QB 383
Jones (RE) Ltd v Waring & Gillow LtdELR [1926] AC 670
Kelly v SolariENR (1841) 9 M & W 54
M & I Instrument Engineers Ltd v Varsada 1991 SLT 106
Murphy v Brentwood District CouncilELR [1991] 1 AC 398
Murphy v CulhaneELR [1977] QB 94
New Mining and Exploring Syndicate Ltd v Chalmers and HunterENR 1912 SC 126
North of Scotland Bank v Mackenzie 1925 SLT 236
Scott (G M) (Willowbank Cooperage) Ltd v York Trailer Co Ltd 1970 SLT 15
Shelley v PaddockELR [1980] QB 348
Thackwell v Barclays Bank plcUNK [1986] 1 All ER 676
Thompson v J Barke & Co (Caterers) Ltd 1975 SLT 67
Tinsley v MilliganELR [1994] 1 AC 340
Young v Clydesdale BankUNK (1889) 17 R 231
Textbook referred to:
Gloag, Contract (2nd edn) pp 331 and 441
The reclaiming motion called before the Second Division, comprising the Lord Justice-Clerk (Ross), Lord Morison and Lord Caplan for a hearing on 4 and 5 October 1994. On 5 October 1994 their Lordships made avizandum.
At advising, on 28 October 1994
LORD JUSTICE-CLERK (Ross)In this action the pursuers are seeking payment from the defenders of the sum of 515,793.95 which the pursuers claim is due to them in terms of a bank draft (or bankers' draft) issued by the defenders in favour of the pursuers as payees. When the pursuers presented the bank draft for payment, the defenders refused to make payment. It is averred by the pursuers that their understanding is that payment was refused because the defenders suspected fraud on the part of some other party. The minuters are a party who claim to have been the victims of fraud or embezzlement on the part of other third parties some time prior to the issue of the bank draft.
In their pleadings the pursuers explain how the bank draft came to be issued by the defenders. As a result of a contract of sale in terms of which a supply of scrap copper was delivered by the pursuers to a company known as James Cosgrove and Sons Ltd, Dundee (hereinafter referred to as Cosgroves), the pursuers were owed the sum of 717,500 US dollars by Cosgroves. The pursuers took various steps with a view to recovering this sum from Cosgroves. As a result, on or about 11th March 1993 Cosgroves granted and delivered to the pursuers a promissory note for 717,500 US dollars together with interest. As a result of further pressure for payment by the pursuers, Cosgroves granted and delivered to the pursuers a further promissory note dated 1st April 1993 for 50,000 US dollars. On or about 28th June 1993 at a meeting at the offices of the pursuers' solicitors in Dundee, representatives of Cosgroves delivered to the pursuers' solicitors a bank draft issued by the defenders. The pursuers were named as payees in the draft. The draft was for the sum of 515,793.95. It is averred by the pursuers: Cosgroves delivered said draft in order to settle the aforesaid liability to the pursuers with interest and expenses. The pursuers accepted said draft in settlement of Cosgroves' said liabilities and in exchange for the draft the pursuers delivered to Cosgroves said two promissory notes.
Following upon the refusal of the defenders to make payment to the pursuers on the draft, the pursuers raised the present action for payment. Separate defences were lodged on behalf of both the defenders and the minuters. In their defences, the defenders contend that the issuing of the draft was induced by the fraudulent misrepresentations of a third party, and that the draft was intended by the person requesting it to serve an illegal purpose, namely a fraud on a third party. Similar contentions are advanced in their defences by the minuters. The case was called before the Lord Ordinary in procedure roll, and after hearing parties the Lord Ordinary held that the defences for both the defenders and the minuters were irrelevant, and he accordingly repelled the defences and sustained the first plea in law for the pursuers and granted decree de plano in their favour. Against that interlocutor of the Lord Ordinary both the defenders and the minuters have now reclaimed.
In his opinion the Lord Ordinary records that a number of matters were ultimately agreed between the parties as follows:
(1) The pursuers, as the payees named in the bankers' draft issued by the first defenders, were not "holders in due course" within the meaning of the Bills of Exchange Act 1882; (2) this remained the case whether, under sec 5(2) of the Act, the draft was treated as a bill of exchange or as a promissory note; and (3) it followed that, as between the pursuers and first defenders, the ordinary law of contract should be applied. This was the analysis made by Lord Dunpark in Thompson v J Barke and Co (Caterers) Ltd at p 69 and, in general, that analysis was accepted as correct.
Before this court parties remained in agreement upon these matters. Both parties lodged grounds of appeal in identical terms. They are as follows:
'(1) The Lord Ordinary erred in law in rejecting the argument for the defenders and reclaimers that the payment effected by bankers' draft was illegal as constituting part of a fraudulent scheme, and that accordingly the defenders were entitled to refuse payment of the bankers' draft.
'(2) The Lord Ordinary erred in law in rejecting the argument for the defenders and reclaimers that the defenders were entitled to refuse payment of the bankers' draft on the ground that its issue was induced by the fraud of James Cosgrove and Sons Ltd.
(3)...
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...[33] below). Counsel also referred to Clydesdale Bank v Paul (1877) 4 R 626, at page 628; Universal Import Export GmbH v Bank of Scotland 1995 SC 73, at page 80C; McLeod v Cedar Holdings Ltd 1989 SLT 620 at pages 623L to 624B; Royal Bank of Scotland plc v Highland Financial Partners LP [201......