High Court of Ireland Decisions

1. This judgment relates to two actions in which the liability of the Ulster Bank Ltd. (“the bank”) to the Shield Insurance Company Ltd. (now Eagle Star Insurance Company (Ireland) Limited and hereinafter referred to as “the plaintiff’) is to be determined. Substantial issues in both cases are the same, but they differ on some important points, as outlined later.

2. The plaintiff carries on an insurance business and has its head office in Cork. A Mr. James O’Callaghan carried on an insurance broker’s business in that city through a company he owned called T.J. O’Callaghan Life and Pensions Ltd. He was a customer of the bank in its South Mall branch in Cork City. He was also an accomplished forger and, up to a point, a successful fraudster and it is his wrongdoing which has led to these proceedings. He defrauded the plaintiff (and others) on six occasions, two of which are the subject of the litigation before me. The first action relates to a transaction in which he was involved with a Mrs. Catherine Murphy. On the 14th January, 1988, Mrs. Murphy drew a cheque for £30,000 on Allied Irish Banks plc naming the plaintiff as the payee, and she gave it to Mr. O’Callaghan for transmission to the plaintiff for what she thought was an investment bond which it had issued in her favour. The bond given to her by Mr. O’Callaghan was, in fact, a forgery and the plaintiff was at that time completely unaware of this transaction and never issued a bond to Mrs. Murphy. Mr. O’Callaghan, either himself or on his direction, had Mrs. Murphy’s cheque endorsed with the words “John Dorgan O’Callaghan L.P.” and either himself or Mr. Dorgan (an employee of his company) lodged the cheque in the bank’s South Mall branch for collection. The broker had two accounts in the branch in the name of his company, one designated an “office account” and the other designated a “clients’ account”. On the instructions of the broker or Mr. Dorgan the lodgement of £30,000 was split and £25,000 was lodged to the credit of the clients account and £5,000 to the office account. On the following day £23,000 was drawn out of the clients’ account by the broker. The fraud was not detected until the following year as a result of which on the 19th April, 1989, the plaintiff’s contract with the broker was terminated. Later, the plaintiff issued a bond to Mrs. Murphy in the same terms as that forged by the broker and has sued the bank in these proceedings as payee of the cheque claiming to be its true owner and that the bank had, as a matter of law, wrongly converted it.

3. Before the broker’s wrongdoing had been discovered he had engaged in another fraud a year later. This time one of his victims was a Mr. Cornelius O’Callaghan. An insurance policy, which Mr. C. O’Callaghan owned, matured and the proceeds were paid to him by cheque for the sum of £19,828.80 by the Standard Life Assurance Company. The cheque was drawn on the Ulster Bank and Mr. C. O’Callaghan was the payee named on it. The cheque was crossed and the words “not negotiable” were added. Mr. C. O’Callaghan arranged with the broker that he would invest £20,000 in an investment bond to be issued by the plaintiff and on the 15th January, 1989, the broker delivered to him a forged bond purporting to be a bond issued by the plaintiff. In return Mr. C. O’Callaghan signed the cheque on the reverse side (in circumstances to be considered in greater detail later) and gave it to the broker together with the sum of £172 to make up the sum of £20,000. The broker lodged this cheque with the bank and on his instructions the sum of £20,000 was paid into his office account, a sum of £17,500 was paid into his clients’ account and a sum of £500 was given to the broker in cash. Later the plaintiff issued a bond to Mr. C. O’Callaghan in the same terms as those contained in the forged bond and in the second action it has sued the bank on the same basis as that pleaded in the first action.

4. The plaintiff’s basic submission is that the bank committed the tort of conversion and can only avoid liability by relying on s. 4 of the Cheques Act, 1959. This section was designed to give a greater measure of protection to collecting bankers than that afforded by earlier legislation. This is to be found firstly in sub-s. 1 which provides:-

5. The banker’s protection is further enhanced by sub-s. 3 which provides:-

6. The plaintiff’s submissions on this section can be summarised as follows:-

7. Having quoted s. 4 and made certain comments on it Diplock L.J. went on at p. 972 of the report:-

8. What facts ought to be known to the banker, i.e., what enquiries he should make, and what facts are sufficient to cause him reasonably to suspect that the customer is not the true owner, must depend on current banking practice, and change as that practice changes. Cases decided thirty years ago, when the use by the general public of banking facilities was much less widespread, may not be a reliable guide to what the duty of a careful banker, in relation to enquiries and as to facts which should give rise to suspicion, is today.

9. The duty of care owed by the banker to the true owner of the cheque does not arise until the cheque is delivered to him by his customer. It is then, and then only, that a duty to make enquiries can arise. Any antecedent enquiries that he has made are relevant only in so far as they have already brought to his knowledge facts which a careful banker ought to ascertain about his customer before accepting for collection the cheque which is the subject-matter of the action, and so have relieved him of any need to ascertain them again when the cheque which is the subject-matter of the action is delivered to him. What the court has to do is to look at all the circumstances at the time of the acts complained of, and to ask itself were those circumstances such as would cause a reasonable banker possessed of such information about his customer as a reasonable banker would possess, to suspect that this customer was not the true owner of the cheque.”

10. The plaintiff made further submissions on the evidence relating to the negligence issue consideration of which I propose to defer until I have examined the defendant’s submissions.

11. The bank became a “holder in due course” it is said because it took the bill in good faith and for value and as such a holder it obtains the rights conferred by s. 38 of the Act of 1882. This means that the bank can sue on the bill in its own name and, as holder in due course,

12. It follows, therefore, that even if its customer’s title was defective it held the bill free from those defects and is entitled to enforce payment of it. For this reason the bank and not the plaintiff (the named payee) was the “true owner” of the cheque and no claim for damages for conversion by the payee at common law exists.

13. I have the following observations on these submissions:-

14. I have emphasised the word “holder” in the section to draw attention to the fact that the section only applies when the customer is a “holder” of the cheque, and as Mrs. Murphy’s cheque had never been endorsed to the broker he was not its “holder” when he lodged it for collection. It follows that the bank never became a “holder” of Mrs. Murphy’s cheque.

15. For the above reasons the bank cannot claim that it was other than an agent for collection of the cheque and it has failed to show that the plaintiff was not its true owner.

16. This submission was based on certain obiter dicta of the trial judge in Thackwell v. Barclays Bank plc. [1986] 1 All E.R. 676, a case whose relevant facts can be summarised as follows.

17. A Mr. Thackwell sold machinery to a firm I shall call Alan Jones for £44,227. This firm sold it on, together with other machinery, to a second firm which I shall call Riva, for £80,989.90. This transaction was financed by a hire purchase company who paid Alan Jones a sum of £80,989.90. Out of that sum Alan Jones issued a cheque for £44,227 to Mr. Thackwell. One of the directors of Alan Jones then forged Mr. Thackwell’s name on the back of the cheque and lodged it for collection in a branch of Barclays Bank. Mr. Thackwell never received payment and he sued Barclays Bank. The evidence established that the whole transaction was an elaborate fraud on the hire purchase company effected by invoicing Riva one machine at an exorbitant figure as well as invoicing a machine that did not exist. The court held that the bank had been negligent in collecting the forged cheque in the way it did but nonetheless refused to grant Mr. Thackwell any relief. The bank pleaded as a defence the doctrine of ex turpi causa non oritur actio and claimed that Mr. Thackwell had been a party to or had knowledge of the fraud on the hire purchase company. The court (per Hutchison J.) held that Mr. Thackwell had been in fact a party to the fraudulent re-financing transaction and it concluded that it would not permit him to make a claim against the bank on the grounds of public policy, “just as it would prevent a burglar from whom the stolen goods were snatched by a third party just as the burglar left the victim’s house from maintaining an action in conversion against the third party” (page 689).

18. Having so decided the judge went on to make further comments on which the bank in this case relies. Having concluded that Mr. Thackwell had been fraudulent he went on to express the opinion that even if he had found Mr. Thackwell innocent and that the director of Alan Jones alone had been the perpetrator of the fraud he would have denied Mr. Thackwell recovery. And so counsel in this case argued that if Mr. Thackwell could not recover against the bank, even if he was ignorant of the fraud, so too the Shield Insurance Company, though wholly innocent of the fraud committed on it and on Mrs. Murphy, could not recover.

19. It seems to me that this submission is based on a misconstruction of the judgment. In Thackwell v. Barclays Bank plc [1986] 1 All E.R. 676 the court agreed that when the doctrine was invoked its task was firstly (a) to look at the proximity of the illegal conduct relied on by the defendant with the claim maintained by the plaintiff and then (b) “consider whether there are other considerations which as a matter of public policy ought to effect the plaintiff’s right to recover” (at page 687). The court concluded that the plaintiff was not entitled to recover in conversion against the bank because the cheque alleged to have been converted constituted in reality the very proceeds of the fraudulent conduct established in the case and the judge expressed the view that “by permitting Mr. Thackwell recover the proceeds of this cheque from the bank I should, as it seems to me, be indirectly assisting in the commission of a crime” (p. 689) and as a matter of public policy he declared he would not have been entitled to relief. I can find no considerations of public policy in this case which would justify a refusal of the plaintiff’s claim should negligence be established. Certainly the court would not be assisting in the commission of a crime by so doing, because it would not, by awarding damages, be ordering the return of stolen money. The court’s order would in effect compensate the payee of a cheque which had, as a matter of the application of common law principles, been converted by the collecting bank. This defence must therefore fail.

20. I propose to examine these submissions in the next part of my judgment in which I shall express my conclusions on the evidence which the parties adduced at the hearing on the negligence issue.

21. The legal principles applicable have been clearly stated in the authorities to which I was referred by the plaintiff. The plaintiff is entitled to damages for conversion unless the defendant can establish that it took reasonable care that its customer’s title to the cheque was not defective. What facts are sufficient to cause a bank reasonably to suspect that its customer is not the true owner of the cheque depends on current banking practise. All the circumstances surrounding the transaction including past circumstances may be relevant.

22. A banker is not to be treated as having been negligent by reason only of his failure to concern himself with an irregularity in the indorsement on a cheque (s. 4, sub-s. 3 of the Act of 1959). But if there are other circumstances either antecedent to the transaction in suit or part of the transaction in suit which, taken in conjunction with the irregularity of the indorsement, would put a prudent banker on inquiry, then the irregularity in the indorsement, and the failure of the banker to concern himself with that irregularity, may be considered by the court in considering whether the banker has been guilty of breach of duty to the cheque’s true owner.

23. Each case must ultimately depend on its own facts. But there may be special circumstances in a case which affect the banker’s duty of care to which the banker should pay particular regard. Those special circumstances may include, as in this case, a situation in which a customer maintains two accounts, an office account and a clients’ account, and in which it is clear that the customer is holding money in an account as a trustee. Previous movements in and out of that account by the customer which may suggest that it is not being operated in a manner consistent with the customer’s duty as a trustee may be relevant in considering the bank’s duty in relation to the payment into a clients’ account of a cheque which has been irregularly indorsed.

24. I turn now to the facts relevant to the negligence issue which the evidence has established.

25. In the period October, 1986, to January, 1988, the broker’s office account was continuously overdrawn. In March, 1987, the bank refused to honour a debit transfer because it was overdrawn and in May of that year a cheque for £1,821.19 was not honoured, and a cheque for £1,398.25 dated the 4th August and cheques for £453.13 dated the 23rd December, and for £400 dated the 12th January, 1988 (that is, just two days before the broker’s fraud on Mrs. Murphy), were not honoured because the broker had exceeded permitted overdraft levels. During this period there were substantial sums transferred from the clients account to the office account, £3,000 on the 2nd January, 1987, £5,000 on the 13th February, £1,000 on the 7th April, £1,000 on the 3rd July and £2,240 on the 11th September, 1987.

26. The bank called Mr. O’Callaghan as a witness. I did not find his testimony to be reliable and where it conflicts with that of Mr. Coyle, the secretary of the plaintiff company, I prefer Mr. Coyle’s evidence. I am not satisfied that it was a regular practice of the broker (a) to obtain payment by cheque of his client’s premiums which he lodged to his clients’ account and (b) then to transfer to his office account his commission on those premiums and (c) then to remit to the plaintiff a cheque for the net premium. Mr. Coyle’s testimony satisfies me that, after the initial premium, all annual premiums were paid by direct debit by the policy holder to the plaintiff, that in respect of the first premium, only rarely was it paid to Mr. O’Callaghan who then forwarded a net cheque to the plaintiff; and this did not happen in the case of large single premium policies. I conclude on the evidence that the transfers from the clients’ account to the office account were not used, except to a very limited extent, to pay sums to which the broker was entitled by way of commission. The size of the transfers and the fact that they were in rounded figures raise an inference that they were not transfers of a percentage of premiums received by the broker. This inference taken with the evidence of the broker’s financial difficulties raise a further inference, namely, that it was probable that the broker was using his clients’ money to pay his office expenses and to reduce his overdraft on his office account. It is to be borne in mind that this practise was not an isolated one and on occasions the clients’ account was actually overdrawn.

27. I come now to the irregularity in the endorsement on Mrs. Murphy’s cheque and the circumstances surrounding its lodgement. I am sure that it is common for bankers to accept for collection on their customer’s behalf third party cheques some of which are properly endorsed in their customer’s favour, some of which are not endorsed at all, and some of which may have irregular endorsements. It is, however, important firstly to drawn attention to the nature of the particular irregularity in this case. Here, the payee had not attempted to endorse it – it was endorsed by the bank’s customer. The endorsement was ambiguous as it could be an endorsement executed by the broker on behalf of the payee or it could be an endorsement by the broker claiming to be its holder in favour of the bank. Secondly, the broker asked the bank to pay the proceeds of the cheque into his clients’ account. From this it could reasonably be inferred that the proceeds did not belong to the broker. The bank at the same time was instructed to transfer £5,000 to the broker’s office account, that is to pay to himself a substantial sum out of the proceeds of a cheque which the payee had not endorsed. Bearing in mind the inference as to the possible impropriety of the transfers from the customer to the clients’ account, the nature of the irregularity of the endorsement, and the circumstances surrounding its lodgement I have come to the conclusion that a prudent banker would have made enquiries about Mrs. Murphy’s cheque before accepting it for collection. That a prudent banker would have done so was the view of Mr. Crean, an experienced banker, whose opinion I have no difficulty in accepting and I conclude, therefore, that the bank was negligent in the manner it discharged its duty to the plaintiff and that the plaintiff’s claim for damages for conversion must be allowed.

28. It is claimed on behalf of the bank that the plaintiff should have been more watchful of the broker and that it was guilty of contributory negligence in that it failed to carry out any audit of his accounts, never monitored the broker’s business in any way and permitted him to make payments of gross premiums to himself. I do not think that this plea is a valid one. The plaintiff had no reason to query the honesty of the broker and was not in possession of the facts concerning the operation by the broker of his two accounts which were available to the bank and the other circumstances to which I have referred including his financial difficulties. There was no cause for the plaintiff to insist that an audit of the broker’s business be carried out, or to have requested consultation about the broker’s affairs with the bank. The practice by which the broker was permitted to make net payments of premiums to the plaintiff did not exist in the way suggested by Mr. O’Callaghan. There was in my opinion no contributory negligence on the plaintiff’s behalf.

29. The plaintiff’s claim in the second action relates to a cheque dated the 15th January, 1989, in favour of Mr. Cornelius O’Callaghan. As pointed out already Mr. C. O’Callaghan owned a life policy which had matured and its proceeds were paid to him by a cheque drawn by the Standard Life Assurance Company on its account in the Ulster Bank for the sum of £19,828.80 in which he was named as payee. This cheque is significantly different to Mrs. Murphy’s cheque. Mr. O’Callaghan’s cheque was crossed with the words “and Co.” and was also marked “not negotiable”. The cheque had the following words printed on the back:

30. This “Receipt” was signed by Mr. Cornelius O’Callaghan and was dated the 19th January, 1989. But the letter “R” on the face of the cheque had been cancelled by computer overprinting. This meant that the signature on the cheque was ambiguous as it might have been signed by Mr. C. O’Callaghan as a receipt (who may have ignored the “R” cancellation) or he may have intended his signature as an endorsement for the purpose of negotiating it.

31. Mr. C. O’Callaghan is an elderly person and found it difficult to attend the hearing at the time the court could have taken his evidence. In the circumstances counsel agreed with my suggestion to accept the statement on his behalf which had been made by his solicitor in the course of correspondence to the effect that Mr. C. O’Callaghan signed the cheque as an endorsement and gave it to the broker together with a sum of £172 in payment to the Shield Insurance Company of a premium for an investment bond purportedly issued by that company in his favour and which had been handed to him by the broker.

32. I approach, therefore, the issues in this case on the basis that although this was a non-negotiable cheque it had in fact been endorsed by its payee, Mr. Cornelius O’Callaghan, and given by him to the broker for delivery to the plaintiff.

33. This transaction was a fraudulent one. The broker issued a forged investment bond, then lodged the cheque to his “clients account” in the defendant bank and then drew out in his own favour a sum of £23,000 on the following day and never paid any money to the plaintiff. The broker had, it is clear, no title to this cheque.

34. Quite clearly s. 81 of the Bills of Exchange Act, 1882, applies. This provides:-

35. As the broker had no title to this cheque, the bank got no title to it and in the light of the evidence I am satisfied that the “true owner” of this cheque was the plaintiff and that the bank owed a duty of care to the plaintiff in relation to it.

36. The acceptance from a person other than the payee of a crossed non-negotiable cheque without making enquiries is not in itself conclusive evidence of negligence on the part of a banker should the payee have been defrauded. It is, however, a matter to be taken into consideration together with all the other relevant circumstances when deciding whether the banker was guilty of breach of duty to the true owner. (See Crumplin v. London Joint Stock Bank [1911-13]Ltd. All E.R. 647.)

37. It has been agreed that I can accept for the purposes of this case the evidence adduced in the case of Mrs. Murphy’s cheque. The bank has failed to displace the inference of possible impropriety involved in the transfers between the broker’s accounts which that evidence raised. A prudent banker in January, 1989, should have been mindful of this inference when presented with a non-negotiable cheque for collection by a customer which had an ambiguous signature which might or might not be an attempt to endorse it in his customer’s favour. In addition he would notice that this transaction related to client’s money but £2,000 was to be transferred to the broker’s office account and £500 to be given to him in cash. In these circumstances a prudent banker would, in my opinion, have concerned himself with the propriety of this transaction and have made enquiries of his customer before accepting it. This, too, was the opinion of Mr. Crean, and I must conclude that the bank has failed to establish that it was not negligent.

38. The plaintiff, the true owner, was not in any way negligent in relation to this particular transaction nor generally, for the reasons already given, in relation to the broker. A plea of contributory negligence therefore fails.

39. The defendant’s final submission related to the level of the damages recoverable if the defendant’s liability is established. The plaintiff had entered into a written contract with the broker on the 1st April, 1988, (referred to as a “tied agency” agreement), which, inter alia, regulated the terms on which commission was payable and also the circumstances in which it could be terminated. The right to termination arose when the fraud was discovered (and this is not contested) but it is said that after it was terminated the plaintiff became entitled to the commission which otherwise it would have had to pay to the broker on the renewal of annual premiums (a sum which the defendant calculates amounted to approximately £7,000) and this benefit should be set off against the loss recoverable from the defendants.

40. I cannot agree with this submission. In respect of Mrs. Murphy’s cheque the bank has established that the tort of conversion occurred in January, 1988. The damages recoverable are the value of the cheque. The sums recoverable from a third party under a contract entered into between the plaintiff and the third party cannot be set-off against those damages. The same considerations apply in relation to the damages payable for the tort of conversion which occurred in January, 1989, and which is the subject of the second action.

41. There will be judgment in favour of the plaintiff in both actions for the amounts claimed i.e. £19,828.80 in 1990 No. 17396P, and £30,000 in 1990 No. 17395P.