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Anslam Kaluarachchi

RISK LIES ON BANK ON PAYMENT BY MISTAKE

Introduction

One of the major risks lies on bank on payment by mistake. It is necessary to consider the instance of payment by mistake by bank. In other words these are situations which bank pays a cheque without a valid mandate. First and foremost is the case where payment on forged instruments. It includes forged signature of the drawer or payee, signed in excess of an agent’s authority, and executed an unauthorized alteration of the instrument. Secondly banks do occasionally pay cheques despite countermand orders. In the third place, where bank honours a cheque, that customer had not sufficient funds to meet the amount. Fourth case, where mistaken payment through electronic media (Internet Payments). Finally, the payments by the banks are not permitted by the law.

However, banks have protection against on widespread liability, when bank paid mistakenly not for consideration and change of the payee’s position, thus esstopel can be pleaded to recover money paid by mistake.

 

(I) Payment on Forged Instruments

If the payee knew of the forgery or was aware of the bank’s error, recovery would be permitted on the basis of fraud. The bank could sue the payee for deceit or wave the tort and sue for money.

The matter is more complex where the payee, too, is under mistake of fact or is innocent of fraud. These cases will now be considered. Lord Mansfield[1] stated that, ‘it is an action upon the case, for money had and received to the plaintiff’s use. In which action, the plaintiff can not recover the money, unless it be against conscience in the defendant, to retain it: and great liberality is always allowed, in this sort of action. But it can never be thought un conscientious in the defendant, to retain this money, when he has once received   it upon  bill of exchange indorsed to him for a fair and valuable consideration, which he had bona fide paid, without the least privity or suspicion of any forgery.’ There are instances which insist that the plaintiffs (Banks) were not entitled to recover, because they, being bankers, ought, before they paid the bill, to have satisfied themselves that the acceptance was genuine. On the other hand it was said that the plaintiff, having given notice of the forgery to the defendants on the day next after the bill had been paid, were entitled to recover back the money, on the ground that they had paid the money under a  mistaken supposition that the acceptance was the genuine acceptance Sewell and Cross, and the case of Wilkinson v. Johnson[2] was relied on.

In Cocks v. Masterman,[3] ‘the simple rule was laid down in clear language for the first time that when a bill becomes due and is presented for payment the holder ought to know at once whether the bill is going to be paid or not. If the mistake is discovered at once, it may be the money can be recovered back; but if it be not, and the money is paid in good faith, and is received in good faith, and there is an interval of time in which the position of holder may be altered, the principal seems to apply that money once paid cannot be recovered back. That rule is obviously, as it seems, indispensable for the conduct of business. A holder of a bill cannot possibly fail to have his position affected if there be any interval of time during which he holds the money as his own, or spends it as his own, and if he is subsequently sought to be made responsible to hand it back. It may be that no legal right may be compromised by reason of the payment.

In respect of the cheques, Lord Lindley,[4] ‘the amount could be recovered, the board refused to follow the line of decisions beginning with Price v. Neal[5] where recovery had been denied. The gist of their Lordship’s opinion was that the cheque was a forgery and was not a negotiable instrument. Being a simple unendorsed cheque, there were no indorsers to whom notice of dishonour had to be given.’ Kerr J.[6] held that ‘the bank could recover the money paid on the basis of mistake of fact, I have come to the conclusion, in the same way as the editors of Paget’s Law of Banking at p.386, that the reasoning of the majority of the Supreme Court of Ceylon,[7] and in particular the judgment of Fisher CJ,[8] are clearly to be preferred.’

It is apparent early 18th century negligence was bar to recover payment on forged instruments.[9] Subsequently, it was changed gradually.[10]

 

(II)    Countermand of payment

Where a bank pays a cheque, the payment of which has been countermanded, can the amount paid be recovered from the payee as money paid under a mistake of fact? The balance of authority is that, provided there has been an effective countermand, it is possible to recover. Constructive countermand is insufficient. In the words of Cozen-Hardy MR in Curtice v.London City and MidlandBank [11] If a countermand of payment is desired by the customer, it should be communicated quite unequivocally to the relevant person in the bank, who may excepted to make payment or supervise such payment.[12] In ignorance of such a direction, and if a servant of the bank made payment knowingly of it, legal obligation is constituted against him.[13]

The authorities on the recovery of money paid under mistake are manifold, and are notoriously difficult to reconcile. Even the basis for claim of money had and received has been the subject of great debate by judges of great eminence and writers of great academic distinction. Lord Greene[14] is reported as saying, ‘The first is that the claim cannot now be said to be based on some rule of aequum et bonum  by virtue of which a man must not be allowed to enrich himself unjustly at the expense of another.

Lord Denning,[15] on the other hand says, ‘Their Lordships were referred to some cases 30 or 40 years ago, where disparaging remarks were made about the action for money had and received: but their Lordships venture to suggest that these were made under misunderstanding of its origin. It is not an action on contract or imputed contract….. It is simply an action for restitution of money which the defendant has received but which the law says he ought to return to the plaintiff.

This was explained by Lord Wright,[16] ‘All the  particular heads of money had and received, such as money paid under mistake of fact, money paid on consideration that has wholly failed, money paid by one who is not in pari delicto with the defendant, are only instances when the law says the money ought to be returned.’

Barwick CJ pointed out, ‘the subject of money paid under mistake is not fully exhausted by decision.’[17] The Court of Exchequer Chamber[18] held that if the plaintiff could satisfy a jury as to their forgetfulness, they were entitled to succeed [emphasis added]. It was succinctly stated by the Baron Parke.[19] This dictum has been frequently discussed.[20]

Converse, decision taken by Lord Gillard,[21] ‘in this case, unlike the large number of authorities cited to me, the defendant was never entitled in law as against the plaintiff to payment of Gossler’s cheque. The obligation imposed on the plaintiff was in favour of the customer Gossler. It was not bound by any duty to the defendant to pay the cheque. So far as the defendant was concerned, if the plaintiff had refused to honour the cheque, its sole redress was against Gossler.’ On the other hand, the basis or foundation underlying the transaction of the payment by the plaintiff to the defendant was the plaintiff’s authority or mandate to pay Gossler’s cheque which had not been appropriately countermand by him. Now I have already decided the cheque was not countermanded, and adopting the test deduced by the Privy Council from Kelly v. Solari in the Norwich Union Fire Insurance Society case, and of the Chief Justice in the Latec case, I would hold that the ignorance of the manager and the teller in this case did not constituting a mistake as to the underlying assumption for the payment by the plaintiff of Gossler’s cheque. On this ground alone I would dismiss the claim. If I should be wrong in this conclusion, I would have been disposed to follow the decision of Roche J in Barclay & Co Ltd v. Malcolm & Co (1925) 133 LT 512’[22][emphasis added]

As per Farwell J,[23] ‘If you are claiming to have money repaid on the ground of mistake, you must show the mistake is one which led you to suppose that you were legally liable to pay.’ In this context his Lordship was thinking in terms of the payee being legally entitled to payment, and the payer being legally liable to pay the recipient’ [emphasis added].

 

(III)Insufficient funds

If a bank honours a cheque or any other form of negotiable instrument and subsequently discovers that the customer had not sufficient funds to meet the amount, the authorities seem to indicate that it cannot recover. In this context, it is, important to understand the time when bank realized customer has not sufficient funds to meet the payment. Simply, it is matter of passing of property.

The ordinary rule of law is that the property in chattel passes according to the intention of the parties. In an ordinary transaction of sale, where the proposed seller says to the proposed buyer, ‘I will sell you such and such goods at such price’, the assent of the buyer signified by the word ‘done’ is enough to fix the right of property. In the case of a gift the property passes by delivery, and so with all the ordinary transactions of life. When a cheque is presented at the counter of banker, the bank has authority on the part of his customer to pay the amount their in specified on his account. The money in the banker’s hand is his own money. On presentment of the cheque, it is for the banker to consider whether the state of account between him and his customer will justify him in passing the property in the money to the holder of the cheque.

Erle CJ[24] stated that, ‘In this case the banker’s clerk had gone through that process, and so far as in him lay did that which would pass the property in the money to the plaintiff. The banker counted out the notes and gold and placed them on the counter for the plaintiff to take up. It no longer remained a matter of choice or discretion with him whether he would pay the cheque or not. The plaintiff had taken possession of the money, counted it once, and was in the act of counting it again, when the clerk, who had gone from the counter, finding that there was mistake, not as between him and the bearer of the cheque, but as between him and the customer, returned and claimed to revoke the act of payment which on his part was already complete, and claimed to have the money back. Now, the bankers had parted with the money, and the plaintiff had accepted it. It is true he had not finished counting it, and that, if had found note too much or a note short, there was still time to rectify the mistake. But, according to the intention of the parties, and the course of business, the money had ceased to be the money of the bankers, and had become that of the party presenting the cheque. It was the clear opinion of the jury that the property passed; and equally clear am I, if it was a question of law for me, that the bankers did by that which took place the property in the money to the holder of the cheque. On that basis I am opinion that the plaintiff is entitle to retain the money.’ [Emphasis added]. This decision was very lucidly applied in the latter cases.[25]   

But, if the customer had obtained by mistake from the banker’s money to which he was not entitled, the money was held to be recoverable back[26] [Emphasis added]

 

(IV)Internet payments

This covers instruction of payments, such as CHAPS[27] and SWIFT[28]  transfers.The law on mistaken payments[29] may be briefly summarised after recent High Court decisions in David Securities v Commonwealth Bank of Australia;[30] and Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation[31]. In a nutshell:

·         a mistaken payment is recoverable since the recipient is unjustly enriched

·         in order to establish a prima facie right to recovery, the plaintiff must show that the payment was made because of a mistake

·         it is then up to the defendant to establish reasons why the payment should not be returned.

Applying this law to the case of an electronic payment, a payment has been made under a mistake of fact to a person who would not have been paid but for the mistake. As a consequence, the payer has a prima facie right of recovery. The onus is then on the defendant to show why the payment should not be returned.

(V)    Payments rendered void by law

During the course of routine banking activities we have seen in several occasions, the money pays by the banks are not permitted by the law. At the time the cheque was presented the company’s account was in credit and the bank had the mandate of the company to honour it. It did so and did not raise any objection, by reference to the law or otherwise, to the performance of its basic obligation to the company s its customer.[32] The Robert Goff J,[33] ‘…the bank is entitled to debit the customer’s account with the amount of the cheque, and further that the bank’s payment is effective to discharge the obligation of the customer to the payee on the cheque, because the bank has paid the cheque with the authority of the customer.’ 

There are two distinct dispositions of the company’s property involved. As between the bank and the company, the bank by debiting the company’s account to the extent of amount, reduced its debit to its customer. As between the company and the bank had acted as the company’s agent and paid the company’s money to the defendant in discharging of the company’s obligation to the defendant.

Clough JA,[34] follows that, at the time the relevant payment was made it was validly made out of the company’s account in reliance on the company’s mandate. There was total failure of the consideration for the bank’s payments to the defendant which entitled the bank to recover the payment. The payment was made by the bank as the company’s agent in consideration of the discharge of the company’s obligation and it was that discharge which would have enabled the bank to indemnify itself against its principal by debiting the company’ account. The elimination of the discharge and of the bank’s entitlement to debit the company’s account by operation of law and the consequential failure of the consideration for the bank’s payment entitles the bank to recover the payment from the defendant as money had and received to the bank’s use.[35]

 

The protection available for banks on mistaken payments

Virtually, on paying and collection it was a bar to the banks to do their banking activities during the early 18th century due to the mistaken payments did not give opportunity to recover.[36] The situation was gradually changed after the Kelly v. Solari[37]  Now banks are entitle to recover money paid by mistakenly to the third party unless they paid it value and consideration.[38] But, if payee not satisfied the consideration for money had and received it may restrain to hold the money received from the bank mistakenly and very lucidly bank could recover the payment.[39]

 

Now most of limitation had to recover the mistaken payments is debarred by the modern context and it was realized us on above discussion. Moreover following protections are available for banks to function their paying and collection.

(i)           Good consideration

This is a good defense so far bank could success on proof of money paid mistakenly[40] and not for the consideration.[41] Plainly, it must prove defendant is unjustly enriched on the receipt of the payment.[42] It is not necessary to hold proprietary rights by the payee, because restitutionary claim is based on unjust enrichment.

On the other hand it is boomerang to the bank if they would pay the money to the defendant without the mandate of the customer or when it was resisted by the customer.[43] But, still the bank has defense, if it could prove, the banks mistake was induced by the payee, or possible where the payee, being aware of the payer’s mistake, did not receive the money in good faith.[44]

  (ii)         Change of position

This defense has been restrictively interpreted by the courts. The defense of the change of the payee’s position is based on consideration of common justice. The onus is very heavy one since the defendant must show a change of position as a result of the particular payment.[45] In a case where agent transferred money received, to the principal without knowing the mistake of money received, then the agent is not liable.[46] Lord Goff[47] stated that, ‘if thief steals my money and pays it to a third party who gives it way to charity, that third party should have a good defense to an action for money had and received. In other words, bona fide change of position should of itself be good defense in such cases as these [emphasis added].’

 

Moreover this principal widely recognized through out the common law world.[48]

(iii)             Estoppel

In an action by bank to recover money paid by mistake, esstopel may be pleaded in two situations.

(a)   Where there is a misrepresentation of fact by bank which induces a third party to act to its detriment;

Lynskey J[49] said, ‘if as a result of a mis-statement by a bank, a person is induced to spend more money than he has got to spend, then it seems to me in ordinary case.. they are acting their detriment.’ In a similar vein Viscount Cave LC[50] said that, ‘There is great body of authority in favour of the view that where  person to whom money has been paid by mistake has been misled by the payer’s conduct, and on the faith of that conduct has acted to his detriment, the payer cannot in law… insist on payment. Mathew J.[51] pointed the judgment of Abbot CJ in Skyring [52]‘It will be found on examining the case that the judges decided that the money could not be recovered, because the mistake was one with which the customer had nothing to do.’ The same principal may be detected in Chamber v. Miller [53]and Pollard v. Bank of England.[54] 

              

(b)   Where there is a breach of a duty by bank towards its customer.

A bank owes duty of care to its customer but no duty on same to a third party and therefore a third party is precluded from raising the defense of estoppel on the basis of a breach of a duty. Abbott CJ[55] stated that, ‘in an action brought by his personal representative to recover such pay, the paymaster was not able to retain any of the sums with which they had credited him by way of increased pay, and which they had allowed him to consider his own for so long a period of time’[emphasis added].

 

Conclusion

It is apparent that the risk lies on bank could be minimized on mistaken payments when it has not been paid for consideration and change of the payee’s position. Further, estoppel may be pleaded, where there is a misrepresentation of fact by bank which induces a third party to act its detriment and breach of a duty by bank towards its customer.

Anslam Kaluarachchi-Attorney-at-Law

LL.B (SL), LL.M(Wales), LL.M(Colombo),LICA

Tele: 0773658590



[1] Price v. Neal King’s Bench Division (1762) 3 Burr 1354; 97 ER 871

[2] 3 B &C 428

[3] 9 B&C 902, Mathew J. King’s Bench Division London & River Plate Bank v. Bank Of Liverpool [1896] 1 QB 7

[4] Privy Council Imperial Bank of Canada v. Bank of Hamilton [1903] AC 49

[5] King’s Bench Division (1762) 3 Burr 1354; 97 ER 871

[6] National Westminister Bank Ltd v. Barclays Bank International Ltd. [1975] QB 654

[7] Imperial Bank of India v. Abeysinghe (1927) 29 NLR 257 ‘ This concerned  claim by a paying bank against the payee of cheque.’

[8] Gowers v. Lloyds and National Provincial Foreign Bank Ltd. [1938] 1 All ER 766

[9] Supra Price v. Neal; Mathew J. London & River Plate Bank v. Bank of Liverpool [1896] 1 QB 7 at 10. ‘Lord Mansfield is reported to have said that the acceptor was bound to know the drawer’s handwriting. From that it was argued that the foundation of the liability of the plaintiff in such case was negligence and that if there was no negligence the acceptor was entitled to recover the money back. But that is not the decision.’

[10] Kelly v. Solari (1841) 9 M & W 54 at 59 Parke B. ‘if money is paid under the impression of the truth of  fact which is untrue, it may generally speaking the recovered back, however careless the party paying may have been in omitting to use due diligence to inquire into the fact’; Supra, Imperial Bank of Canada v. Bank of Hamilton [1903] AC 49

[11] [1908] 1 KB 293 at 299‘Countermand is really a matter of fact. It means much more than a change of purpose on the part of a customer. It means in addition, notification of that change of position to the bank. There is no such thing as constructive countermand in commercial transaction of this kind.

[12] Fletcher Moulton LJ. Curtice v. London City & Midland Bank Ltd [1908] 1 KB 293 at 299.

[13]  Clegg J.Bank of New South Wales v. Deri (1963) 80 WN (NSW) 1499.

[14] Morgan v. Ashcroft [1938] 1 KB 49 at 62; [1973] 3 All ER 92 at 96.

[15] Privy Council in  Kiriri Cotton Co Ltd v. Dewani [1960] AC 192 t 204-5; [1960] 1 All ER 177 at 181.

[16]  Fibrosa Spolka Akeyjna v. Fairbairn Lawson Combe Brbour Ltd [1943] AC 32 at 62-4; [1942] 2 All ER 122 at 136-7.

[17] Porter v. Latec Finance (Qld) Pty Ltd (1964) 111 CRL 177; [1965] LR 3, Chitty on Contracts (22nd edn) vol1, pp 1554-6; Goff & Jones on The Law of Restitution pp 5-14.

[18] Kelly v. Solari (1841) 9 M & W 54; [1835-42] All ER Rep 320

[19] Ibid. M & W 58-9; All ER Rep 322

[20] Gillard J. Commonwealth Trading Bank v. Reno Auto Sales Pty Ltd [1967] VR 790

[21] Ibid.

[22] Roche J. rejected the claim on three grounds. Refusing to formulate the principles with respect to money had and received, his Lordship continued, at 513.

[23] Re Bodega Co Ltd [1904] 1 Ch 276 at 286; [1900-3] All ER Rep 770; Chambers v.Miller (1836) 13 CB (NS) 125;143 ER 50; Deutsche Bank (London Agency) v. Berrio & Co (1895) 73 LT 66; [1895-9] All ER Rep 1164; cf Weld Blundell v.Synott.  

[24] Court of Common Pleas. Chambers v. Miller (1862) 13 CB (NS) 125; 142 ER 50

[25] Cockburn CJ,Blacburn J Pollard v. Bank of England (1871) LR 6 QB 623; Cox v. Prentice 3 M & S 344; Holland v. Russell 1 B & S 424; 30 LJ (QB) 308: ‘it would obviously be of great importance to a banker, who had by mistake paid money, to be entitled to demand it back from the bank of England, instead of being obliged to have recourse against the customer of that bank. Chambers v. Miller 13 CB (NS) 125; 32 LJ (CP) 30.

[26] Supra Kelly v. Solari

[27] Clearing House Automated Payment System.

[28] Society for Worldwide Interbank Financial Telecommunication.

[29] http://ausllii.edu.ou/~alan

[30] Ibid

[31] Ibid (1988) 78 ALR 157 162 at 168 per curiam

[32] Atkinson in Westminister Bank Ltd v.Hilton (1927) 136 LTR 315 t 317.

[33] Barclays Bank v. W.J. Simms Ltd at 699 D

[34] Hong Kong Court of Appeal Bank of East Asia Ltd v. Lam & Co (Unreported, No 49 of 1987)

[35] Kelly J Walter v. James (1871) LR 6 Ex 124 at 127 and Goff and Jones (3rd edn) p 95  

[36] Supra Price v. Neal

[37](1841) 9 M & W 54 at 59 Parke B

[38] Supra Commonwealth Trading Bank v. Reno Auto Sales Pty Ltd

[39] Supra Barclays Bank v. W.J. Simms Ltd

[40] G. Vigro, ‘Recent Developments in Restitution of Mistaken pyments’ [1999] CLJ 478, 481

[41] Supra Barclays Bank v. W.J. Simms Ltd ; Bank of New South Wales v. Murphett [1983] VR 489; Lloyds Bank plc v. Independent Insurance Co. Ltd.[2000] QB 110 (CA)

[42] Ibid Lloyds Bank plc v. Independent Insurance Co. Ltd ; Where Waller LJ assumed that the defense of good consideration was a form of change of position and Peter Gibson LJ, although separating good consideration from change of position, characterized the former as a form of the defense of bona fide purchaser for value.

[43] Supra Barclays Bank v. W.J. Simms Ltd ; Goff J. ‘ the money is paid to discharge, and does discharge,  debt owed to the payee ( or a principal on whose behalf he is authorized to receive the payment) by the payer or by a third party by whom he is authorized to discharge the debt.

[44] Supra Lloyds Bank plc v. Independent Insurance Co. Ltd

[45] Re Jones Ltd v. Waring and Gillow Ltd [1962] AC 671; It has been stated that ‘where the payee had done nothing more than to expend the money on his own purpose, that has been held to afford no defence.’

[46] Lord Atkinson  Kleinwort Sons & Co v. Dunlop Rubber Co (1907) 97 LT 263 at 265; an agent would be liable unless, before the mistake was discovered, he had paid over the money which he received to the principal, or settled such an account with the principal as amounts to payment, or did something which so prejudiced his position that it would be inequitable to require him to refund.

[47]House of Lords Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548

[48] USA American Law Institute, Restatement of the Law, Restitution (1937) section 142 pp 567-578 and Palmer The Law of Restitution (1978) vol III, para 16.8; It has been judicially recognized by the Supreme Court of Canada Rura Municipality Of Storthoaks v. Mobil Oil Canada Ltd (1975) 55 DLR (3d) 1); it has been introduced by statute in New Zealand (Judicature Act 1908, section 94B (as amended), and in Western Australia Trustee Act 1962, section 65(8), and it has been judicially recognized by the Supreme Court of Victoria: see Bank of New South Wales v. Murphett [1983] 1 VR 489; Australia and New Zealand Banking Group Ltd v. Westpac Banking Corporation (1988) 78 ALR 157 162 at 168 per curiam.

[49] Lloyds Bank Ltd v. Brooks (1950) 6 LDAB 161 t 169

[50] Re Jones Ltd v. Waring and Gillow Ltd [1926] AC 671at 683

[51] Deutsche Bank (London Agency) v. Beriro and Co (1895-1899) All ER Rep 1164

[52] Skyring v. Greenwood (1825) 4 B & C 281.

[53] (1862) 13 CBNS 125

[54] (1871) LR 6 QB 623.

[55] Supra Skyring v. Greenwood