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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Devron Potatoes Ltd v. Gordon & Innes Ltd & Ors [2002] ScotCS 284 (25 October 2002) URL: http://www.bailii.org/scot/cases/ScotCS/2002/284.html Cite as: 2003 SCLR 103, [2002] ScotCS 284

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OUTER HOUSE, COURT OF SESSION
CA91/01	OPINION OF LORD CLARKE in the cause DEVRON POTATOES LTD Pursuers; against GORDON & INNES LTD AND OTHERS Defenders:   ________________

Pursuers: Ellis; Balfour & Manson

Third Defenders: Connal, Q.C., Solicitor Advocate; McGrigor Donald

25 October 2002

Introduction

1. This commercial action is one of a number of cases before the Commercial Court, which have arisen, out of the receivership of the first named defenders Gordon and Innes Ltd, who are a company who acted on behalf of a significant number of potato growers in Scotland in the marketing and sale of potatoes. In the present action, the third defenders, who are the Royal Bank of Scotland Plc, are convened along with Gordon and Innes Ltd and the receivers of that company, as co-defenders. The action relates to sums which the pursuers, as potato growers, claim they are due to be paid in respect of sales monies arising from the sale of potatoes grown by them.

The Remedies Sought

2. In the present action, the conclusions directed against the third defenders are as follows.

For declarator that:

"1(c) in particular, all said monies deposited in the first defenders' designated Grower's bank account with the third defenders, are not part of the property of the first defenders.".

For declarator that:

"3(ii) 'The third defenders were not in good faith in the event that they applied sums in the said grower's account which contained sums relating to the sales of the pursuers' members committed potatoes for season 1999/2000 in satisfaction of debts owed to them by the first defenders and the third defenders are liable to make recompense of said sums to the pursuers, subject to any deduction to the level of the appropriate pool prices and subject to deduction of properly incurred pool costs; and (iii) seperatim sums relating to sale by the first defenders that the pursuers' members potatoes for said season lodged in the said Grower's Account, were held by the third defenders as constructive trustees for the benefit of the pursuers subject to any deduction to the level of the appropriate pool prices and subject to the deduction of properly incurred pool costs."

The pursuers then, in conclusion 8, seek:

"Count and reckoning by the third defenders of (i) all sums in the first defenders designated Grower's Account no. 0129844 relating to sales of the pursuers' members committed potatoes by the first defenders for season 1999/2000, which had been applied by them to extinguish any indebtedness owed by the first defenders to them and (ii) all sums collected by the second defenders after 3 August 2000 relating to sales of the pursuers' members committed potatoes by the first defenders for the season 1999/2000 and which have been so applied by the third defenders; in order that the true balance due to the pursuer subject to any deductions, to the level of the appropriate pool prices and deduction of properly incurred pool costs may be ascertained."

The pursuers, then, in conclusion 9 seek;

"Decree for payment by the third defenders to the pursuers of the sums so ascertained in terms of the eighth conclusion, "

and in conclusion 10 seek:

"Payment by the third defenders to the pursuers of the sum of four hundred and fifty-eight thousand pounds (£458,000 sterling), with interest thereon at the rate of 8% per annum from the date of citation until payment," failing an accounting by the third defenders in terms of the eighth conclusion.

The Pursuers' Pleadings

3. In Article 3 of condescendence, it is averred that the pursuers are a co-operative of potato growers which has been registered under the Industrial and Providence Societies Act 1965. In Article 4 of condescendence, it is averred that, by virtue of an agreement among the members of the pursuers, entered into in terms of the pursuers' rules, the pursuers are appointed as marketing agents in respect of "the committed potatoes". The phrase "committed potatoes" is defined in clause 1(a), in the agreement, as "all certified seed grown for export purposes which have been grown on any designated farm". It is, furthermore, averred that clause 5 of the agreement provided for members to pay a charge to the pursuers and that sums for potatoes sold, are received by the pursuers, who then deduct the sums comprised in the charge and distribute funds to the members thereafter. It is then averred, that clause 6 of the agreement provided for the pursuers to receive the price of the potatoes sold for their members. The members are said to be potato farmers operating in the north-east of Scotland. In Article 5 of condescendence it is averred as follows:

"By agreement dated 22 October 1987, the pursuers appointed the first defenders as sole marketing agents for the pursuers. Clause 1 of said agreement states: 'G and I Ltd have been appointed sole marketing agents for DP Ltd with total control over the "committed potatoes" (as defined in the individual members agreement with the Society), and the company has accepted this appointment'".

Later in Article 5 of condescendence, it is averred as follows:

"By letter dated 28 June 1999, the pursuers gave to the first defenders three years notice of termination of said agreement of 22 October 1987."

The pursuers, furthermore, aver that:

"In relation to the selling of committed potatoes, there was no direct contractual relationship between the first defenders and the pursuers' members. The contractual relationship was between the pursuers and the first defenders."

In Article 5 of condescendence at page 15, it is averred by the pursuers as follows:

"On 1 July 1999, the pursuers made clear to the first defenders that they were only prepared to continue to do business with the first defenders for that season if the proceeds of sale were kept in a separate account."

The averments of the pursuers in Article 7 of condescendence commence as follows:

"The price of potatoes fluctuates over the season. In accordance with the customs of the trade for the marketing of agricultural produce by agricultural co-operatives, the pursuers and the first defenders operated a 'pool system' for the payment of the price of the committed potatoes to the growers. The purpose of the pool system is to ensure that the risk of price fluctuations over the season and the risk of any potatoes remaining unsold, is shared by all the growers who are members of the co-operative. During the season, the marketing agent sells produce to different buyers at different prices. The final pool price cannot be ascertained until the season has ended and all the produce which can be sold has been sold. At that stage, the marketing agent calculates the pool price, by dividing the total of the sums received from buyers at different prices, by the total tonnes sold. This average price is then paid to the growers, subject to the marketing agent's commission and costs incurred by the marketing agent on behalf of the growers. In order to assist with growers cash-flow, interim payments are made on the basis of predictions of what the pool price will be, and a final balancing payment is made once the pool price is calculated. The first defenders operated a pool for each variety of potatoes. The pursuers were part of those pools which included other growers. The pursuers themselves operated a pool amongst their own members."

In Article 10 of condescendence, it is averred on behalf of the pursuers as follows:

"As a result of representations from inter alia the pursuers made in 1999, in about October 1999, the first defenders advised the pursuers that they had set up a designated grower's bank account with the third defenders. This was confirmed by the first defender's Mr Roy in a letter to Mr French dated 19 October 1999 in which he stated inter alia that the first defenders had 'set up a separate grower's account into which all income for potatoes would be paid and payments to growers and other direct costs will be made'".

The letter stated that such a separate account had been set up "for the first time for the 1999/2000 season". The pursuers reasonably understood from that letter that a separate account was being created as they had demanded into which was all income for growers committed potatoes would be paid, and only payments to growers and direct costs associated with the sale of growers potatoes would be deducted. The money paid into the account was money from a number of growers of potatoes dealing with the first defenders. The arrangement did however include sums earned from the sales of committed potatoes produced by the pursuers' members. The pursuers understood that the account was used to pay direct costs incurred in relation to the sale of potatoes of the growers, and as these were sometimes incurred in advance of sales, it was possible that the account would be overdrawn, especially at a time when there had been few sales. The account was not however to be operated as a general trading account of the first defenders. Only direct expenses in relation to sales of the grower's potatoes in the defenders' commission in relation thereto, could be taken from the account. The account no. was 0129844.

4. As at 2 August 2000, the sum at credit of the account was £1,233,203. This included substantial sums obtained from the sales of committed potatoes from the pursuers' members. After that date, the pursuers have, despite persistent requests, not been given information by the second or third defenders as to what has happened to the sums in that account. The sums at credit have been disbursed. This has been, either by the actions of the second defenders or by the third defenders, applying the sums at credit to debts of the first defenders on other accounts, or both. The second defenders have continued to collect payments due for sales of committed potatoes of the pursuers' members since their appointment. Those sums may have been applied to reduce indebtedness to the third defenders." Later on in Article 10 of condescendence it is averred, on behalf of the pursuers, as follows:

"Explained and averred that by late spring 1999, there was considerable concern amongst the pursuers' members about late payment of sums due to which they were entitled to be paid by the first defenders. There was a meeting on 1 July 1999 at which directors of the pursuers and the first defenders, were present at which it was made clear that the pursuers were only prepared to continue to do business with the first defenders, if a separate account was established for the proceeds of sales of potatoes and from which only payments to growers and direct costs associated with the sales of relevant potatoes, would be deducted to protect those proceeds from the third defenders. There was further pressure from the pursuers in this regard including a letter dated 14 October 1999. Subsequently, the pursuers were advised that the 'Grower's Account' was established. As averred, the pursuers were advised of the setting up of the account. There was no other reasonable explanation for the change, other than an intention to keep the proceeds of sales of potatoes separate from the first defenders' trading account and protected from the third defenders; in other words to distinguish those proceeds from the property of the first defenders."

The pursuers then go on to aver as follows in Article 11:

"By 31 August 2000 the net sum collected which was due to be paid to the pursuers in terms of the contract between the pursuers and the first defenders, was £438,465.28 in respect of sales of the pursuers' Members committed potatoes. Most of that sum would have accrued prior to 3 August 2000. Some accrued after that date. The first defenders are due to account to the pursuers for the sum received for sales of the pursuers' members potatoes for the season 1999/2000."

In Article 13 of condescendence it is averred as follows:

"The relationship between the pursuers and the first defenders was one which involved fiduciary duties on the part of the first defenders to account for the pursuers for sums received for such sales. The proceeds of which were thus held in 'trust' for the pursuers. The first defenders are obliged to account to the pursuers in respect thereof."

The pursuers then aver as follows:

"To the extent that the third defenders have subsequently intromitted with sums to the credit of the Grower's Account, which were at credit of the account on 2 August 2000, they are obliged to account to the pursuers for that part of said sums in respect of such sales for the pursuers' members. To the extent that the third defenders have subsequently received sums ingathered by the second defenders in respect of such sales, they are also obliged to account for the pursuers for said sums. The legal bases for the liabilities to account of the second and third defenders, are as averred in the subsequent Articles of condescendence."

In Article 14 of condescendence it is averred as follows:

"In about February 2000, a firm of accountants KPMG started to carry out an investigation into the first defenders' business on the third defenders' instructions. This involved consultation with the first defenders' secretary and directors. It also involved access to the first defenders' papers and books. On or shortly after 31 May 2000, the report resulting from these investigations was given to the third defenders. The KPMG report dated 31 May 2000, stated that the first defenders were 'acting as selling agents for the pool'. It further stated that the separate pool was operated for each variety of potatoes and that the Growers received the sales value of the relevant variety, after deduction of the first defenders direct costs in operating the pooling arrangements. Their report further stated that G and I (the first defenders) sell the potatoes to ... customers ... on behalf of the pool growers."

"In Appendices to the report, including accounts and projections, the income for the first defenders from sale of grower's potatoes as (sic) shown as 'Pool Commission', not as the value of the sales on behalf of the growers. It also showed projection of cash-flow for the separate Grower's Account. As confirmed in a separate brief "pre-receivership" report by the firm of which the second defenders are Partners, Price Waterhouse Coopers dated 13 June 2000, the second defenders' firm had access to that full KPMG report. The pre-receivership report further showed a separate 'G and I Office Account' and Grower's Account. It also showed cash-flow projections for the separate Grower's Account."

5. In Article 15 of condescendence, it is averred that the second defenders, upon their appointment as receivers to the first defenders, became constructive trustees for the benefit of the pursuers of the monies from relevant sales of the pursuers' grower's potatoes.
6. I have set out, thus far, a good deal of the pursuers' averments which provide the background and context for the claim, which they say they have against the third defenders, as it is necessary to have regard to these averments for that purpose. However, when the case made by the pursuers against the third defenders came before me for debate, the concentration was ultimately very largely focused on the averments to be found in Article 16 of condescendence and I will now set these out in full. They are as follows:

"At relevant times for the sale of the pursuers' members' committed potatoes for season 1999/2000, the third defenders were aware that a separate account was set up into which prices received for Grower's sales were placed, and from which expenses associated with such sales were taken. The account was styled 'Grower's Account' in about October 1999. Their records must have shown such receipts and payments from the account. As an important lending institution in the agricultural area of Huntley, in which much produce is grown, the third defenders would have been aware of the widespread practice of sales of produce being carried out by marketing agents, who were then obliged to account to the growers (or as in the case of the pursuers, the Grower's Co-operative). A John Robinson, a manager of the third defenders' Specialised Lending Services, had a meeting with Directors of the first defenders in or about 24 February 2000. In his minutes of that meeting, Mr Robinson noted that the first defenders' Growers 'operate on profit share'. He also noted that 25% of the potatoes sold by the first defenders, were produced by the pursuers' members. He noted that the first defenders acted as 'sole marketing agent'. He noted that there was a pool system, from which the first defenders took a commission of about 17%. Differently from other accounts, the first defenders' grower's account is shown as having a nil overdraft limit. In a letter dated 23 February 2000 from KPMG, who were instructed on their behalf, the third defenders were told that the first defenders' growers shared the gross profit. The third defenders also received the report from KPMG dated 31 May 2000 as previously averred. Further, they also received the pre-receivership report from the second defenders' firm dated 13 June 2000, as previously averred. The third defenders received the report from KPMG on or shortly after 31 May 2000. Further, by letter dated 30 June 2000 from the pursuers' chairman to the Business Relationship Manager at the third defenders' Huntley Branch, the third defenders were specifically advised that the first defenders acted as agents only, that proceeds of sale of the pursuers' members potatoes did not belong to the first defender, but were held in an agency capacity and could not be utilised to fund the first defenders' operations. The third defenders were, in any event, put on inquiry in order to be in good faith in dealing with sales of produce in that account. They had sufficient notice, whatever their perception of the 'Grower's Account', inter alia to inquire into the circumstances of the relationship between the pursuers and first defenders in order to be in good faith. Had they enquired of the first defenders' Secretary and Directors, the true position would have been advised to them about the sale of the potatoes on behalf of the pursuers' members the existence of the relationship of principal and agent and the agreement between the first defenders and pursuers, that proceeds of sale would be kept in a separate account. The second defenders were appointed for the third defenders' benefit and close communication would have taken place between them. The third defenders in practice had access to all information available to the second defenders. Had the third defenders made further enquiry of the pursuers or their members, (of whose interest they were aware, acting as bankers for some members), the true position would have been made apparent to them. Had they enquired into the available documents, the true position would have been made apparent to them. Had they made such enquiries they would not, in good faith, have been able to intromit with the funds. In the event that the third defenders intromitted with the funds in the Grower's Account, containing sums received for sales of the pursuers' members potatoes for season 1999/2000 or received and intromitted with continuing proceeds from the sale of the pursuers' Members said potatoes after 2 August 2000, they were not in good faith. They were aware of sufficient facts to be aware of the fiduciary capacity, on which the first defenders held the ingathered proceeds of the sale of the pursuers' members potatoes for season 1999/2000, for the benefit of the pursuers and of the pursuers' contentions to that effect. They simply took a commercial risk. Their actions were at their own risk. They have become lucratus as a result. They are obliged to repay such sums to the pursuers, having been unjustly enriched thereby. Separatim the third defenders had notice of sufficient facts then to be aware, or at least put on notice as to the existence of the fiduciary capacity, on which the first defenders held and ingathered proceeds of sale of the pursuers' members potatoes for season 1999/2000, for the benefit of the pursuers. The third defenders accordingly became constructive trustees for the benefit of the pursuers in relation to such sums. On both said grounds, they are liable to account to the pursuers for the sums so received."

7. The pursuers' pleas-in-law directed as against the third defenders, are as follows:

"1. The first defenders having made sales of the pursuers' members committed potatoes as a agent for the pursuers, all prices received therefore, subject to any deduction to the level of the appropriate pool prices, and deduction of properly incurred pool costs, belong to the pursuers and decree of declarator should be pronounced in terms of conclusion 1(a) to (e).

5. The third defenders having in bad faith being lucrati by the first defenders and/or the second defenders' breach of fiduciary duty, the pursuers are entitled to recompense from the third defenders, to the extent that the third defenders were lucratic thereby and decree of declarator should be pronounced as concluded for in conclusion 3(ii).

6. Separatim the third defenders having received sums relating to the sale by the first defenders of the pursuers' members committed potatoes, said sums were held by them as constructive trustees for the pursuers benefit and decree of declarator should be pronounced as concluded for in conclusion 3(iii).

The Third Defenders' Submissions

8. As previously noted, the matter came before me for debate on the third defenders' preliminary plea relating to relevancy. As will have been seen, the pursuers' pleadings are far from being crisp, on occasions are not even good prose and are, at times, somewhat difficult to follow. Mr Connal, Queens Counsel, Solicitor Advocate for the third defenders, sought dismissal of the action in so far as it is directed against the third defenders. His submissions in support of his motion for dismissal, in the event, became focused entirely on the case, apparently made by the pursuers to support their fifth plea-in-law. It became clear, in the course of the debate, that neither of the parties representatives were prepared to address the Court in relation to the pursuers' case, based on constructive trust and I was, in due course, advised by both Mr Ellis, counsel for the pursuers, and Mr Connal, that they were in agreement that, if the Court were to hold that there was sufficient in the pursuers' pleadings to allow a proof before answer in relation to the case reflected in the pursuers' fifth plea-in-law, the Court should also allow a proof before answer on the case based on constructive trust. Equally, if the Court held that there was not sufficient or relevant averments to support the fifth plea-in-law, the sixth plea-in-law of the pursuers fell to be repelled and the action, in so far as directed against the third defenders as a whole, should be dismissed. I am bound to say that I found it entirely unsatisfactory and inappropriate that matters were approached in this way by both sides, but I consider that I had, in the event, no option but to proceed on the footing that had been agreed.
9. Mr Connal, for the third defenders, in opening his submissions, urged the Court to resist any temptation to allow a proof before answer, simply on the basis that the pursuers' pleadings were lengthy and involved, and that consequently the true position could, perhaps, only become clear after enquiry. Any temptation, in that respect, should be resisted because what was pled against the third defenders was a case based on bad faith on their part, and such cases required careful scrutiny at the stage at which relevancy and specification issues were raised. The bank account in question, was, he said, an account operated by the first defenders simply as one of a number of accounts operated by them as customers of the third defenders. The first defenders stood, throughout the relevant period, as customers and debtors of the third defenders and were debtors of the third defenders throughout that period, in respect of all the accounts they operated. It was acknowledged by the pursuers in their pleadings, that the first defender had trading relationships with growers other than the pursuers and the account was apparently operated in relation to transactions carried out for other growers as well as for the pursuers. The first defenders' relationship in law with the pursuers and other growers, was not straight forward. The account in question was operated in such a way, that the first defenders paid costs and charges out of it, in relation to the business which they transacted on behalf of growers such as the pursuers. The operation of pooling arrangements meant that there was no direct relationship between prices obtained for individual sales of specific lots of potatoes, and the sums which the growers eventually obtained. These factors were referred to as the relevant background to the issue.
10. The fact was that the series of relationships, in relation to which the account was operated, lay behind the pursuers' case, which was to the effect that the third defenders knew or ought to have known that any monies in the account in question, were not the property of the first defenders and that, accordingly, the third defenders were not entitled to treat such monies simply as part of the general money going into the first defenders' accounts with the third defenders. The question then was, in so far as the third defenders had treated these monies, as if they were simply part of the first defenders' funds, paid into the account, were the third defenders acting in bad faith? An allegation of bad faith was a serious allegation for the pursuers to make. It was an allegation made on the basis that, because of knowledge on the part of the third defenders, that the monies in question were "trust" funds, the third defenders had no right to deal with them as if they were the funds of the first defenders themselves. With regard to the question of knowledge, the pursuers' pleadings were lacking as to when exactly this knowledge was said to have been acquired by the third defenders. Did it arise from the very opening of the account itself, or did it come about at a later date and, if so, when? There were no averments that the third defenders had ever been asked by the first defenders, to open a trust account for the benefit of the pursuers, far less that they had agreed to do so.
11. The pursuers relied on averments to support their case as to what the pursuers themselves, and the first defenders, had agreed and what was understood by them about the operation of the account in question. These averments did not instruct a case of knowledge on the part of the third defenders. In so far as the pursuers sought, as they did in Article 14 of condescendence, to rely on the content of the KPMG report, that was, at best, neutral for them and, at worst, negatived the assertion that the funds in question were held in trust for the pursuers, the proceeds of the sales of the potatoes being described therein as part of the turnover the first defenders.
12. The averments of the pursuers in Article 16 of condescendence did not assist the pursuers in making a case, that the third defenders had been acting in bad faith. They contained, apparently, three separate chapters - firstly averments of facts said to be known to the third defenders, which, it was apparently contended, were sufficient to show them to have been acting in bad faith. Secondly, averments to the effect that the third defenders should have been on notice as to the true nature of the account, and to whom the monies placed therein belonged, or, at least that, in the circumstances, they had a duty to make enquiries about these matters and that, having failed to do so, they were put in bad faith. Thirdly, the pursuers seemed to rely on some local custom which should have affixed the third defenders with knowledge of the true nature of the account and whose property the funds were. The averments in question, separately, and cumulatively, were insufficient to instruct a case of bad faith, given the high degree of specification that was required for such a case. The averments were also, in some respects, inconsistent with each other. The basic point was that the pursuers had simply failed adequately to aver a basis for the serious allegation of bad faith made against the third defenders, far less had they made it clear when and how the third defenders came to be in bad faith. The action, therefore, in so far as directed against these defenders, should be dismissed as irrelevant.

Pursuers' Submissions

13. In reply, counsel for the pursuers submitted that their primary case against the third defenders was founded on unjust enrichment. It was made against the background of the claim directed against the first and second named defenders, that the first named defenders had acted as agents for the pursuers in selling potatoes produced by the pursuers' members and that, as such, they collected the prices paid for the potatoes on a fiduciary basis. The fiduciary basis of the relationship was denied by the first and second defenders and this was a matter which, it was understood, was to be the subject of a proof before answer. The pursuers averred that by 3 August 2000, £438,465.28 was the net sum shown which the first defenders had collected on behalf of the pursuers and which should have been paid to them. Those sums should have been paid into the "Grower's Account" of the third defenders.
14. The pursuers' case against the third defenders was that, in so far as the sums were paid into the account, and in so far as the third defenders had applied them for their own purposes, they had done so in a way which was inconsistent with the fiduciary duties owed by the first defenders to the pursuers, in respect of the payment of the sums. Moreover, the third defenders were now liable to account for the sums in question because they knew, or ought to have known, that the funds were held by the first defenders in a fiduciary capacity for the pursuers.
15. The principle upon which the pursuers rely, it was submitted, was that when a bank applies trust funds to its own interests, it must account to the beneficiaries for the sums in question, unless the application of the funds by the bank on their own behalf, was done in good faith and for value. To establish that the bank had not acted in good faith, in such a situation, did not require the pursuers to aver fraud on their part. Counsel for the defenders, in making the submissions he did, it was submitted, had been requiring a standard of averment necessary for a case of fraud, but not necessary for a case like the pursuers were pleadings against the third defenders.
16. I was referred by counsel to the case of Thomson v Clydesdale Bank (1893) 20 R (HL) 59. In that case a stockbroker had paid sums into his overdrawn bank account, which represented the proceeds of sale of certain shares which he had sold on the stock exchange for a body of trustees. The sum was to have been reinvested on behalf of the trustees. The stockbroker did not reinvest the sum and absconded. The trustees sued the bank for the sum in question. There was no evidence that the bank had known that the broker had improperly paid the monies into his bank account. In those circumstances, the House of Lords held that the bank was not bound to repay the money to the trustees. In that case, the Lord Chancellor, (Lord Herschell), at page 60 said this:

"It cannot, I think, be questioned that under ordinary circumstances a person, be he be banker or other, who takes money from his debtor in discharge of a debt, is not bound to inquire into the manner in which the pursuer so paying the debt acquired the money with which he pays it. However that money may have been acquired by the person making the payment, the person taking that payment is entitled to retain it in discharge of the debt which is due to him. But it is said that in the present case the bankers took with notice that the sum which they received was a sum of money not belonging to their debtor personally, but which he held or had received for other persons, and that, having had this knowledge or notice, they are not entitled to retain it in discharge of Mr Thomson's debt. My Lords, I cannot assent to the proposition that even if a person receiving money knows that such money has been received by the person paying it to him an account of other persons, that of itself is sufficient to prevent the payment being a good payment and properly discharging the debt due to the person who receives the money. No doubt if the person receiving the money has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt, money which he has no right to hand over, then the person taking such payment would not be entitled to retain the money, upon ordinary principles which I need not dwell upon. But in the present case there appears to be an absolute absence of any evidence of that kind."

17. I am bound to say that, at first sight at least, I considered, as I indicated to counsel for the pursuers, that that passage seemed to argue against the case which the pursuers seem to be making against the third defenders in the present action, since as counsel for the pursuers accepted, the case the pursuers make against the third defenders is not based on the fraud either of the first defenders or the third defenders. Counsel, however, went on to refer me to more recent authorities, and, in particular, the case of Style Financial Services Ltd v Bank of Scotland 1996 SLT 421. In that case, a finance company provided credit to individuals who bought goods from a company. Those to whom credit was thus extended, were bound to repay the finance company directly or to make payment to the company from whom they purchased the goods. Payments received by the company from the individuals were lodged in a bank account held in the company's name. These payments included cheques drawn in favour of the finance company. The finance company had authorised the bank to credit the company's account with such sums. The bank account was, at all material times, overdrawn. The bank applied the money in discharge of the sums due on the account. The company went into receivership at a time when it owed money to the finance company. The finance company brought an action against the bank for payment of the sums owed to them by the company. The finance company contended that, in collecting payment from the individuals, the company had been acting as the finance company's agents and that therefore the company had been under a fiduciary duty to account to them. They furthermore averred that the bank knew, or ought to have known, (a) that the company was acting as the finance company's agents, (b) that the money paid into the account was owed to the finance company, and (c) that in failing to pay the money to the finance company, the company had been acting in breach of fiduciary duty. The finance company's argument was that, in these circumstances, in retaining the money in question, the bank was acting in bad faith and was not entitled to benefit from a breach of fiduciary duty of which it had had notice. The Lord Ordinary allowed a proof before answer. The defenders reclaimed. The reclaiming motion was refused by the Second Division. In the opinion of the Court, which was delivered by Lord Justice Clerk Ross, the case of Thomson's Trustees v Clydesdale Bank was discussed. At page 426 I - K, Lord Justice Clerk Ross said this:

"We have come to the conclusion that the pursuers have averred sufficient to support a case that there was a fiduciary relationship between Goldberg and the pursuers. We are also satisfied that there were sufficient averments to support the view that the defenders knew of the existence of this relationship and that there had been a breach of that fiduciary relationship. Although the averments regarding what was contained in the minutes can be criticised, we have come to the conclusion that sufficient has been averred from which the Court might draw the inference that the defenders were aware of the existence of this fiduciary relationship. If the defenders were aware of the existence of this fiduciary relationship and that the funds paid into Goldberg's account were the pursuers' funds, then we are satisfied that sufficient has been averred to entitle the pursuers to seek to make out a case based on recompense. We recognise that there is much to be said for the view that the relationship between the pursuers and Goldberg was essentially one of debtor and creditor, but we are satisfied that sufficient has been averred to entitle the Court to draw the inference that there was a fiduciary relationship."

18. The case subsequently came before Lord Gill for proof before answer. It is reported at that stage in 1998 SLT 851. His Lordship assoilzied the defenders. He did so for the reason that, on the facts, the defenders, the bank, had an express mandate in their favour by the pursuers that they could credit the company's account with sums drawn in the pursuers' favour. That pointed against the sums in question, being subject to any trust - see page 855, 857L and 863. On the facts, there was nothing to show that the defenders thought that these sums were subject to a trust or that they ought to have been on enquiry as to the possible existence of such a trust, page 861L. Since his Lordship held, on the facts, that the sums in question were not the subject of a trust as between the pursuers and the company, that was an end of the pursuers' case, which depended on establishing that fact. But, in any event, his Lordship held that had there been a trust and had the company been guilty of a breach of it, the defenders would only have been liable, had they been in bad faith. In relation to this matter, his Lordship at page 867 said this:
    
"In Scots Law in a case such as this, the recipient of trust funds is in bad faith

if he knows that the funds are paid to him in breach of trust ... . In the present case I need not consider what circumstances short of actual knowledge would put the recipient in bad faith, because counsel for the pursuers has affirmed that he relies solely on the defenders having had actual knowledge of the alleged breach of trust."

He then continued at page 867K - 868B as follows:

"The facts of this case do not establish bad faith on the defenders' part. The pursuers must show that the defenders' knowledge extended to two crucial matters: first, that the monies deposited with them did not belong to Goldberg, and secondly, that Goldberg had no authority to pay the monies into their overdrawn account (Thomson v Clydesdale Bank Ltd, Lord Watson at page 61; Lord Shand at page 62-63). In my view, the pursuers' case fails on both questions. The defenders never saw any of the contracts entered into by the pursuers with Goldberg and they were never put on notice as to the terms of those contracts. Neither the pursuers nor Goldberg at any time represented to the defenders that the relevant monies was subject to a trust. On the contrary, all of the cash-flow information given by Goldberg to the defenders showed these monies as being available to Goldberg as part of their normal cash-flow. Moreover, the defenders had the mandate from the pursuers in their favour. This expressly authorised and requested them to credit cheques and postal orders made payable to the pursuers to Goldberg's account. In my opinion, the effect of the mandate in this case, was that the defenders could not have been said knowingly to be in receipt of unauthorised payments of trust funds, if that is what those funds had been. In this respect, the case for the defenders is a fortiori of that in Thomson v Clydesdale Bank Ltd. Finally, where pay-ins were made in the form of cash or of cheques made payable to Goldberg, the defenders could not know how much, if anything, of those moneys represented Style collections. For these reasons, I consider that if the monies had been trust funds, the defenders would have been in good faith in receiving them and in allowing Goldberg to draw against for their own purposes."

19. Counsel for the pursuers submitted that, in the present case, the pursuers had averred enough to set up a case that the relationship between the pursuers and the first defenders was a fiduciary one, which meant that the sums collected by the first defenders were collected by them, subject to a trust, in the pursuers' favour and that they had also averred sufficient facts and circumstances that the third defenders knew, or ought to have known, that the was the position when these payments were made into the account in question. Counsel acknowledged that the bank account was not opened as a trust account, but that was not fatal he contended to the pursuers' position. It was a separate account, averred to had been set up for the purpose of keeping the pursuers' funds separate from the first defenders, and for the purpose of avoiding the third defenders having any claim to it. It was specifically designated "Grower's Account" which was a significant feature. The question was one of whether or not the third defenders had notice of the character of the funds lodged in the account and, in particular, that they did not belong to the first defenders. The fact that the account in question was one of a number of accounts operated by the first defenders, and not simply the general trading account of the first defenders, made the position one which was distinguishable from that in Style Financial Services Ltd. Once again, the fact that it was specifically designated "Grower's Account", pointed towards notice of the true nature of the funds in question being given to the third defenders. The question, at this stage, was whether the pursuers had given the third defenders adequate notice of the factors upon which the pursuers relied to set up bad faith on the third defenders' part. In this respect, reference was made to the case of MacDonald v Glasgow Western Hospital 1954 SC 453 at page 4465, where Lord President Cooper said:

"The plea of lack of specification finds its proper application in a case where a defender does not know the case to be made against him and objects to being taken by surprise at the proof."

20. Counsel then referred me to the case of Clark v Ulster Bank Ltd 1949 N.I. 132. In that case a solicitor, who had an account with a bank, opened a second account for the purpose of banking clients' monies. He did not, however, inform the bank of the purpose of the second account when he opened it. The bank claimed that it was entitled to set off the amount which the second account was in credit against sums owed to them arising from the first account. The Court held that, in the absence of any agreement to the contrary, a bank is entitled to combine a customer's accounts and set off the debit balance of those in debit, against the amount standing to the credit of those in credit, unless it has notice that the sums standing to the credit of the customer are trust funds of which the customer has control in a fiduciary capacity. The Court recognised that the bank may, at first, have no notice of the fiduciary nature of the account but, in due course, may acquire such notice. In such a case, it held that the bank may, nevertheless, exercise any right of set off to which it may then be entitled, having regard to the state of the accounts at the time of acquiring such notice. That case was important, it was submitted, for two reasons. The first was that it emphasised that it was a question of fact in each case, as to whether the bank had notice of the true nature of the funds lodged in the account in question. Secondly, it recognised that the position of the bank might change after the account is opened and operated, as far as its knowledge of the nature of the funds is concerned, and consequently so might its right to combine accounts. I should observe that, on one view of matters, the approach of the Court in that case may seem to be at odds with what the Lord Chancellor said in the passed cited above from the case of Thomson when his Lordship remarked:

"My Lords, I cannot assent to the proposition that even if a person receiving money knows that such money has been received by the person paying it to him on account of other persons, that in itself is sufficient to prevent the payment being a good payment and properly discharging the debt due to the person who receives the money."

Nevertheless, it was not submitted by Mr Connal on behalf of the third defenders, that the approach of the Court in the case of Clark was unsound or that it was an approach which was inconsistent with the law of Banking in Scotland. Counsel for the pursuers submitted that, in the present case, the pursuers had averred sufficient facts and circumstances, particularly in Article 16 of condescendence, to allow them a proof as to whether or not the third defenders had actual knowledge, or constructive knowledge, of the true nature of the funds in question, and even if the pursuers were unable to demonstrate that such knowledge existed from the very opening of the account, the case of Clark demonstrated that this was not fatal to the entirety of their claim, provided it could be proved that the third defenders did know, in due course, or ought, in due course, to have known the true nature of the funds being lodged by the first defenders in the "Grower's Account." The sum which the pursuers might be able to recover from the third defenders might vary depending on when, ultimately, the Court decided the bank had, or ought to have had, the necessary knowledge, but the fact that, for the present, for the pursuers, were not, and could not be specific with regard to the precise moment, when the knowledge was or should have been acquired to the exclusion of all other possibilities, did not make the case irrelevant. A question also might arise as to the third defenders' right, in any event, in the circumstances, to combine the first defenders' accounts. Counsel for the pursuers referred to the Stair Memorial Encyclopaedia of the Laws of Scotland Volume 2 at para. 102. There it is stated as follows:

"Where the customer maintains several accounts, the banker must keep these separate, but he is entitled to combine accounts to ascertain the extent, if any, of the balance due to the customer. However, where the accounts are of a different nature, for example a current account and a deposit account, the banker must give notice of the intention to combine."

Counsel for the pursuers submitted that, at the end of the day, the question of what was the extent of first defenders' indebtedness to the bank and the right of the bank, in turn, to combine accounts, if that was what they had done, was a matter for proof.

21. Counsel for the pursuers then turned to discuss the level, extent or nature of the knowledge which the bank, in such a case, must have had before they were to be held liable to account to the person who claimed the monies to be truly theirs. The Solicitor Advocate for the defenders, it was submitted, had approached matters on the basis that what was to be averred was a case amounting to dishonesty on the part of the bank. That was what was required to put the bank in bad faith under this branch of the law. Counsel for the pursuers, initially at least, accepted that if dishonesty had to be averred and proved, the pursuers' case against the third defenders, as pled, did not come up to that test. He submitted, however, that something less than that dishonesty was sufficient. In doing so, he recognised that, at first sight at least, that submission was, perhaps, inconsistent with what was said by Lord Coulsfield in Bank of Scotland v McLeod Paxton 1998 SLT 358. That was an action of multiple-poinding, raised by a bank, against parties having an interest in funds obtained by fraud, which were held by the bank and in respect of which it has issued certain drafts. In the action, the compearing defenders, the victims of the frauds, claimed they were entitled to restitution of the sums of money held by the bank. The bank claim to be entitled to take credit for the sums in which they had been, or might be, found liable to payees under stopped drafts, issued against the funds. Lord Coulsfield, after proof, held that for the defenders to recover the sums paid out by the bank, it was necessary for them to demonstrate that there was dishonesty or improbity, as opposed to mere negligence, on the part of the bank, which required actual knowledge of the fraud or something close to it, evidence of wilful blindness, or any other form of doubtful behaviour being relevant only to deciding whether the necessary inference of knowledge could be drawn. His Lordship held that, in that case, the evidence fell well short of establishing any dishonesty on the part of any official of the bank. At page 272 his Lordship recorded that the principle which governed the pursuers' claim was "recompense or a principle analogous to recompense", namely that no-one can profit from another person's fraud or breach of trust. It was, also, apparently accepted by both sides, in that case, that the starting point for a discussion on that principle was the case of Thomson v Clydesdale Bank.
22. Before turning to discuss Thomson, his Lordship referred to the cases of Clydesdale Bank v Paul (1877) 4 R 626 and Gibbs v British Linen Co (1875) 4 R 630 N, as illustrations of the operation of principle in question. Lord Coulsfield then proceeded to carryout a detailed analysis of the Thomson case. In the course of this analysis he referred to a passage from the speech of Lord Shand which was to the following effect:

"I can see nothing suspicious in the state of the broker's account, and nothing to indicate to the bankers that any funds to be now paid in to wipe out the balance, in all or in part, were being obtained by any violation of duty or fraud; and I agree with the Lord Chancellor in thinking that there was no evidence whatever here of facts which put the bankers on enquiry, or which can be founded on as shewing that they must have believed or known that this was a misapplication of funds." (At page 63).

In concluding his analysis of Thomson, at page 274 B - C, Lord Coulsfield said this:

"That decision, therefore, establishes, as both parties, I think, accepted that in order to establish liability against the recipient of a payment who has given valuable consideration, it is not enough to show the mere receipt of the payment nor even the negligent receipt of the payment. The person seeking recovery, as true owner, must show that the recipient was not in bona fide. It is true that, in the passage quoted above, Lord Shand refers to facts "which put the bankers on inquiry", but, in context, that seems to me to be a reference to the particular facts of the case, in which there was no evidence of anything of the kind, not a qualification on the principle which he had earlier expressed both in Thomson and in Gibbs. The same can, I think, can be said of the Lord Chancellor's reference to the recipient having "reason to believe" and of Lord Kyllachy's reference to constructive knowledge. The question upon which the present dispute turns, therefore, is what the pursuers have to prove in order the show that the bank were not in bona fide. On that particular question, there is no direct assistance to be gained from any later Scottish authority."

His Lordship then referred to a number of cases to which he had been referred and continued:

"but although these cases repeat the principle that a person enriched by the consequence of another's fraud, cannot retain the gratuitous benefit, they did not assist on the question of what has to be proved to show a lack of bona fides, in a case in which the benefit was not gratuitous. The same can be said of Style Financial Services v Bank of Scotland."

His Lordship then turned to consider English authorities on the subject and he observed that:

"The context in which the question of bona fides is discussed in English authorities is perhaps somewhat different in that the ground on which it may be sought to establish the liability of a recipient of funds, is that the recipient has become a constructive trustee, a concept not familiar in Scots Law."

After considering various English authorities, culminating in the case of Royal Brunei Airlines v Tan (1995) 2 AC 378, Lord Coulsfield, at page 275 H, concluded as follows:

"It seems to me, therefore, that it must now be taken to be clear that dishonesty is an essential element in the establishing of liability against a third party in cases such as this. The next question is what is meant by dishonesty for this purpose."

Taking up his consideration of the English authorities again, and in particular the speech of Lord Nicolls in Royal Brunei Airlines, his Lordship at page 276 B-C said:

"In the light of the passages which I have quoted from the speech of Lord Nicolls, it seems to me that liability in English law can now be seen to be based upon actual knowledge, or something very close to or equivalent to it, rather than on failure to make reasonable inquiries."

His Lordship concluded his review of the law in matter to be applied in the case before him in the following terms, at page 276 D-E:

"In the whole circumstances, it seems to me that the correct approach to the question whether the necessary elements for holding the bank liable under Scots Law have been established in the present case, is to look at the way the matter is expressed in Thomson v Clydesdale Bank. I think that particular attention should be paid to some of the expressions used in that case. In the speech of the Lord Chancellor: 'The case of the appellants wholly fails unless they bring home to the respondents much more than has been attempted here, namely, a knowledge that in the particular case the person was not justified in paying over the particular amount'. From the speech of Lord Watson: 'The broker's fraud is of no relevancy in this case, unless it is coupled with bad faith on the part of the respondents. The onus of proving that they acted in mala fide rests with the appellant. It is not enough for him to prove that the respondents acted negligently; in order to succeed they must establish the respondents knew, not only that the money represented by the cheque did not belong to the broker, but that he had no authority from the true owner to pay it into his bank account.' From the speech of Lord Shand: 'Liability against them for the recovery of the sum misapplied arises only where is can be shown directly, or as the reasonable inference from the facts proved, that these parties were cognisant, that the money was being wrongfully used, in violation of the agent's duty and obligation.' What these passages seem to me to show is that evidence of acts or omissions which might be described as showing wilful blindness, wilful or reckless failure to ask questions, commercially unacceptable conduct or any other form of doubtful behaviour, is evidence which can properly be considered, along with any other evidence in case, in deciding whether an inference should be drawn that the person is question was acting dishonestly, but that the question is not whether there was blindness or recklessness per se but whether there was dishonesty or improbity."

23. Counsel for the pursuers submitted that the approach of Lord Coulsfield was subject to criticism, if it were to be taken as being of general application and, in particular, covering a case like the present. In the first place, counsel pointed out that the case of Royal Brunei Airways was concerned with a claim against a third party, who had simply assisted a trustee to commit a breach of trust but had not himself received the trust property. That was to be distinguished from a case like the present, which involved a claim against a third party who, it was said, had received the property in question and had applied it to its own use. Moreover, Lord Coulsfield had placed, it was submitted, too restrictive an interpretation on the approach of the House of Lords in Thomson, in apparently removing from testing for the existence of bona fides in such a case, the requirement upon the benefited parties to make enquiries. It was an approach inconsistent with the approach taken by the Court in the case of Rodger (Builders) Ltd v Fawdry 1950 SC 487. In that case, the Court held that where an intending purchaser of heritable property is aware of a prior contract for the sale of subjects, he is bound to enquire into the nature and result of that contract and is not entitled to rely upon an assertion by the seller that the prior contract is no longer in existence. Any failure to make the necessary enquiry is sufficient per se to deprive him of the character of a bona fide purchaser. Counsel for the pursuers submitted that Lord Coulsfield's formulation of law regarding bona fides, in cases of the present kind, had been too influenced by his considerations of principles of English equity. In Scotland, the matter was governed simply by the concept of unjust enrichment. Even if one approached the matter from the viewpoint of an English lawyer, it was clear that Lord Coulsfield's apparent rejection of the role of constructive knowledge in such cases as the present, and his requirement for actual dishonesty was not appropriate. The present case was one where the third party was said to be a recipient of the funds in question. In Bank of Credit and Commercial International (Overseas) Ltd & Another v Akindele (2001) CH 437, a case involving a claim based on the English law on constructive trusts, where the third party had acquired the funds in question but was held, in the circumstances, not to have acted dishonestly, Nourse LJ at page 448 said: "While a knowing recipient will often be found to have acted dishonestly, it has never been a pre-requisite of the liability that he should." His Lordship accepted that in cases of "knowing assistance" such as Royal Brunei Airlines, the single test was one of dishonesty, by held that in "knowing receipt" cases, there should be a different single test namely "The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt." (At page 455). While counsel for the pursuers was critical of Lord Coulsfield's use of what was said by Lord Nicolls in Royal Brunei Airlines, he, nevertheless, himself submitted that it was helpful for present purposes in that, in discussing "dishonesty" at page 389 under reference to "receipt cases", and accordingly obiter, his Lordship said this:

"Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learns something he would rather not know, and then proceed regardless."

"That passage recognised, it was submitted, a role for the making of enquiries and constructive knowledge, when the absence of good faith was being judged in cases like the present, and was consistent with what the Judges has said in Thomson in passages upon which Lord Coulsfield in the Bank of Scotland case had set out to place, perhaps, an unnecessary loss. The passages in question which pursuers' counsel had in mind were as follows. From the Lord Chancellor's speech at page 60 where his Lordship said 'No doubt if the person receiving the money has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt, money which he has no right to hand over, then the person taking such payment would not be entitled to retain the money, upon ordinary principles which I need not dwell upon."

Counsel emphasised the Lord Chancellor's use of the words "has reason to believe". The second passage was contained in Lord Shand's speech at page 63 where his Lordship said:

"I can see nothing suspicious in the state of the broker's account and nothing to indicate to the bankers that any funds to be now paid into wipe out the balance, in whole or in part, were being obtained by any violation of duty or fraud; and I agree with the Lord Chancellor in thinking that there is no evidence whatever here or facts which put the bankers on inquiry, or which can be founded on as shewing that they must have believed or known that this was a misapplication of funds."

Counsel for the pursuers also placed reliance on the fact that in the Outer House Lord Kyllachy in his judgment, reported, as part of the report of the Second Division's decision in the case at (1891) 18 R 751 at 753, left open the question as to whether constructive knowledge of the true nature of the funds would be sufficient to establish bad faith. The passage in question from the judgment is to the following effect:
"The broad view of the matter, as it presents itself to my mind, is this - that the

case at best for the pursuers is just the ordinary case of a person paying his just debt with money fraudulently obtained or dishonestly appropriated, but received by the creditor in ignorance of the fraud or dishonesty. I know no authority for holding that in such a case the creditor is bound to restore. It might be doubted whether the cash payment can be recovered from a just creditor in any circumstances short of actual complicity on the part of the creditor with the fraud to which the payment owes its source; but at least knowledge, actual or constructive, on the part of the creditor seems essential."

Lord Kyllachy's judgment was affirmed by the Second Division whose judgment, in turn, was affirmed by the House of Lords.

24. Counsel for the pursuers submitted that to allow a role for constructive knowledge, in this area of the law, was also consistent with the approach of the Court adopted in an analogous situation in the case of Rodgers v Fawdry. Counsel for the pursuers contended, also, that the pursuers had averred sufficient in the way of both actual and constructive knowledge, on the part of the third defenders, to allow them an enquiry into whether, in the circumstances, that the third defenders had not been in bona fide, if and, to the extent, they had applied monies belonging to the pursuers to pay off debts due to them by first defenders. The pursuers averred two basic things. The first was that the third defenders had knowledge of a fiduciary relationship that existed between the pursuers and the first defenders. The second was that the third defenders had knowledge that the money being paid into the "Grower's Account" from the sale of the potatoes of the pursuers' members, was held by the first defenders on a fiduciary basis. Counsel for the pursuers accepted that, as a matter of fact, money paid into the account would have included monies which were not held by the first defenders in a fiduciary capacity. Nevertheless, it was sufficient for the pursuers to aver, he contended, that from 1999 the account was used, in part, at least for the receipt of sales monies of the relevant potatoes. The pursuers had averred information which the third defenders had about the account which was sufficient to have put them on enquiry as to the status of the funds being paid into it. If they had made enquiry, they would have discovered the funds represented at least, in part, the proceeds of the sales of potatoes which were the property of the pursuers. It was not fatal to his case, counsel for the pursuers submitted, that the funds were mixed with other funds which were not stamped with a fiduciary character. That was demonstrated by the case of Jopp v Johnston's Trustees (1904) 6 F 1028. In that case, it was held that if a trustee pays trust monies into a bank account of his own, not in any way earmarked to the trust, and also has money of his own in the same account, the Court will disentangle the account and separate the trust monies from the private monies and award the former specifically to the trust beneficiaries. The third defenders, therefore, could not take shelter behind the fact that the account had funds paid into it in addition to those belonging to the pursuers, if they were otherwise not in good faith.
25. The decision of the Second Division in Style Financial Service Ltd made it clear that what had to be averred, in a case like the present, was what was set out by Lord Justice Clerk Ross, at page 426 I. In the present case, the pursuers had averred sufficient in relation to the factors referred to by his Lordship in that passage. The question of whether or not there was a fiduciary relationship between the pursuers and the first defenders was, as a matter of agreement, among those parties, and the second defenders to be the subject of a proof before answer. It could not be said that, on the averments made by the pursuers against the third defenders, they would necessarily fail against the third defenders after proof.
26. Counsel for the pursuers then rehearsed the specific matters relied upon by the pursuers to show that the third defenders had actual, or constructive knowledge of the true nature of the funds in the grower's account, which are set out in Article 16 of condescendence. These circumstances, he submitted, entitled the pursuers to have an enquiry into the matters. He stressed the averments made regarding the circumstances surrounding the opening of the account, the designation of the account and the averments of the verbal communings made between the parties as to what the purpose of the account was, and the fact that it is averred that the account had no overdraft limit. The latter factor showed, it was said, that it was not to be regarded, and should not have been regarded as a general trading account of the first defenders. Counsel accepted that the averments of the pursuers did present, apparently, a cumulative acquisition of information and knowledge by the third defenders over a period of time, regarding the account, and the nature of the relationship between the pursuers and the first defenders and, as a consequence, he recognised that this could produce some difficulties for the pursuers in establishing exactly when the third defenders' position converted from one of being in good faith, to one of being in bad faith, with consequences as to the extent of any liability they might have to account, but, he contended, this was not sufficient to debar them from going to enquiry on these matters. He renewed his motion that a proof before answer should be allowed.

Decision

27. It appears to me that the case, apparently made by the pursuers against the third defenders, raises questions law which are, perhaps, for Scots Law at least, to some extent, of some novelty. With some hesitation, I have come to the conclusion that a proper answer to these questions cannot be given without an enquiry into the facts and that the pursuers have averred just enough to entitle them to a proof before answer of their case against the third defenders. Some of the difficulties that the case raises, in my opinion, come from the fact that pursuers are unable to specify precisely what was done with the funds in question other than to say that whatever was done, was done by the third defenders. That, however, is not the point that the Solicitor Advocate for the third defenders took against the pursuers and it arises, in any event, apparently from the fact that the third defenders themselves do not make their position clear in that respect in their pleadings. But on the hypothesis that the funds in question have either been disbursed to the first defenders, or the second defenders, in their shoes, or have been applied by the third defenders to reduce or wipe out the first defenders' indebtedness to them, or a combination of these things, then the question is, could, in law, the pursuers have a claim against the third defenders based on recompense. (I say nothing about any claim based on constructive trust since, as noted, I was not addressed on that matter by either party). In a way, it seems to me, the starting point for answering that question is to have regard to the case to the Northern Irish case of Clark v Ulster Bank Ltd. In the present case, the pursuers seek to establish that the funds paid into the "Grower's Account" by the first defenders were, in part, at least, funds over which the first defenders had control only in a fiduciary capacity on behalf of the pursuers. They, furthermore, seek to establish that the defenders had notice of that fact. The case of Clark, as I read it, is authority for the proposition that, as from the point in time, when a bank becomes aware that the funds paid into a client's account (where the client has opened more than one account) are only held by the payer in a fiduciary capacity, they have no right to set off those funds again sums due to them by their customer under other accounts. As to whether the bank has such notice is a question of fact to be determined in each case. Black L.J. in that case, as to read his judgment reached his decision very much under reference to established banking law. At p. 134-135, his Lordship set out the relevant principles as follows:

"The position of banks in regard to such customers as solicitors, stockbrokers, auctioneers or estate agents, who might in the ordinary course of their business be expected to be handling substantial sums of money belonging to clients, is not, I think, in any doubt. In the absence of notice, express or implied, the banker is not concerned to question the customer's title to the money paid into the credit of his account, or to question his request to draw cheques upon that account. Such customers as solicitors or stockbrokers or auctioneers or estate agents will frequently keep only one account to the credit of which they lodge both moneys of their own and moneys received by them on behalf of clients. The mere fact that the customer's profession or business is such that it necessarily involves his handling moneys belonging to other people from time to time in his hands, does not affect the banker with notice that any specific sum or sums paid in by the customer are trust moneys, not does knowledge on the banker's part that the customer's practice is to pay moneys received by him on behalf of clients into his bank account, constitute such notice or put the banker on inquiry. He is entitled to treat the money passing through the account as the customer's own (Marten v Rocke, Eyton &c (1885) 53 LT, 946, Thomson v Clydesdale Bank (1893) AC 282). A customer may choose to open two or more accounts with a bank. If he does so, then the banker, in the absence of any agreement to the contrary, whether express or to be implied from the course of business, between them is entitled to combine the accounts and to set off the debit balances on those in debit against the amount expanding to the credit of those in credit. He will not, however, be entitled to take this course and to utilise, for the purpose of discharging the customer's liability on a debit account, the amount standing to the credit of an account or the customer's name which whether from the title of the account or otherwise) the banker has notice is an account for trust funds of which the customer has control in a fiduciary capacity (ex parte Kingston. In re Gross (1871) LR 6 CH 632). If there is no such notice, the circumstance that the moneys to the credit of such account are, in fact, held in a fiduciary capacity, will not affect the banker's right of set-off (Union Bank of Australia v Murray-Aynsley (1898) AC 693). And the fact that the customer who opens a No. 2 of account is a person through whose hands clients' moneys will ordinarily be passing, does not in itself amount to notice to the Bank that the No. 2 Account is an account of this type (Greenwood Teale v Williams Brown & Co (1894)11 T.L.R. 56)."

28. It may be observed that his Lordship's discussion in that passage makes no use of the concepts of fraud or dishonesty, but is focused entirely on the question of the notice which the bank has had of the position. His Lordship, in this context, also envisages circumstances which should put the bank of inquiry.
29. As I noted above, while it may appear, on the face of things, at least, that the approach of the Court in the Clark case is not entirely consistent with what was said by the Lord Chancellor in the Thomson case, I repeat that the Solicitor Advocate for the third defenders did not suggest that the approach of the Court in Clark was unsound or inapplicable in the law of Scotland. It appears to me that, applying that statement of principle to the present case, the pursuers have averred just sufficient to allow them to go to proof on the question as to whether the third defenders had, at some point in time, notice of the true nature of the funds being paid into the "Grower's Account", so as to disbar them, thereafter, from using those funds, or dealing with them in a way inconsistent with their fiduciary nature. Counsel for the pursuers did recognise that there may be certain difficulties, at proof, for the pursuers relating to this question and, indeed, as to the precise effect any such notice would have in the particular circumstances of the case. Nevertheless, I agree with him that that does not mean that, at the present stage, it can be said that the pursuers would necessarily fail against the third defenders in their claim against them. The present case is unlike the case of Style Financial Services Ltd, and, indeed, Thomson and Bank of Scotland, in that it is not averred that the first defenders were committing a fraud or were acting in breach of trust in paying the sums in question into the "Grower's Account". To that extent, although these cases were discussed in some depth before me, the question of bona fides, as discussed in those earlier cases, is, perhaps, not directly in point. In all of those cases, moreover, there was absent the perhaps significant fact in the present case of the funds in question being paid into a separate and specially designated account. In so far, however, as the question of bona fides, as discussed in those earlier cases does arise, I am satisfied that it clearly turns on the question of the nature and extent of notice that the third defenders had about matters and, in particular, as to the nature of the funds in respect of which the claim is made. As I have already indicated, the pursuers, in my opinion, have averred sufficient to allow them a proof before answer on that question. I am not prepared to dismiss the pursuers' case directed against the third defenders on the sole basis of attack made by the Solicitor Advocate for the third defenders, viz that the pursuers had not averred sufficient to instruct a case of fraud or dishonesty on the part of the third defenders. Since I have decided that a proof before answer is necessary, I shall refrain from expressing any further views on what might ultimately prove to be somewhat complex questions to be determined after proof unless I, in any way, inhibit or embarrass that proof.
30. Having regard to the involvement of other parties in the proceedings, it will be appropriate to put the case out By Order to discuss the future progress of the case as a whole.