Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd

[1981] HCA 43

HIGH COURT OF AUSTRALIA

Gibbs C.J., Stephen, Mason, Murphy, Aickin, Wilson and Brennan JJ.

COMMONWEALTH TRADING BANK OF AUSTRALIA v. SYDNEY WIDE STORES PTY. LTD.

(1981) 148 CLR 304

18 August 1981

Banker and Customer

Banker and Customer—Cheque—Fraudulent alteration of name of payee after signature—Duty of customer to take precautions to prevent alteration.

Decisions

August 18.
The following written judgments were delivered: -
GIBBS C.J., STEPHEN, MASON, AICKIN, WILSON AND BRENNAN JJ. The issue here is whether this Court should adhere to its decision in Marshall v. Colonial Bank of Australasia, which was affirmed on appeal by the Privy Council (1906) 4 CLR 196; (1906) AC 559 , or whether we should follow the later decision of the House of Lords in London Joint Stock Bank v. Macmillan and Arthur (1918) AC 777 and apply the principle which it enunciated that the drawer of a cheque will be responsible for any loss caused by his drawing of a cheque in such a manner as to facilitate a fraudulent alteration of the cheque. (at p308)

2. The first respondent sued the paying bank (the appellant) and the collecting bank (the second respondent) in respect of certain cheques drawn on its account with the appellant. The first respondent then had in its employ a man named Prior. From time to time it became necessary for the first respondent to draw cheques in favour of an organization called "Computer Accounting Services" with which it had dealings. The cheques were made out "Pay CAS or order". The first respondent in its statement of claim and the appellant in its defence alleged that Prior altered the cheques in question so as to make them read "Pay CASH or order" simply by adding the letter "H" after the letters "CAS". (at p308)

3. In its statement of claim the first respondent alleged that the appellant in breach of its contractual duty failed to exercise reasonable care in that notwithstanding that each of the cheques bore the words "Pay CASH or order", each of them was crossed, each bore the words "Not Negotiable" and "A/c Payee Only", each cheque was for a large amount and the appellant failed to make enquiries of the first respondent before paying the cheques. (at p308)

4. Paragraph 5 of the appellant's defence pleaded: "In answer to the whole of the Statement of Claim, the Second Defendant says: -
(a) the Plaintiff was its customer. (b) as such customer the Plaintiff owed a duty of care to the Second Defendant in relation to the drawing of cheques upon it. (c) the Plaintiff acted negligently in relation to the subject cheque. PARTICULARS (i) it caused cheques to be executed which were payable to 'CAS' rather than 'C.A.S.' or 'Computer Accounting Services' in such a way as to facilitate the conversion of the name of the payee for 'CAS' to 'CASH'. (ii) it failed to discover the continuing frauds being committed by its employee Winston Thomas Prior and thereby enabled him to fraudulently alter further cheques drawn by the Plaintiff on the Second Defendant. (d) The Second Defendant says that as a result of the said negligence and breach of duty, the Plaintiff is estopped from bringing its claim against the Second Defendant." (at p309)

5. The appellant repeated the allegations in par. 5 of the defence by way of cross-claim and claimed damages from the second respondent. By an amended reply and defence to cross-claim, the second respondent alleged that neither the defence in par. 5 nor the cross-claim had a sound basis in law. (at p309)

6. In the Supreme Court of New South Wales when the action came on for hearing the parties requested Rogers J. to make an order that par. 5 of the defence and the reply and defence to the cross-claim should be determined separately from other issues in the action. Rogers J. acceded to this request and made the order sought. (at p309)

7. Having heard argument on the matters raised by par. 5 of the defence his Honour decided to follow Marshall (1904) 1 CLR 632; (1906) 4 CLR 196; (1906) AC 559 , as indeed he was bound to do, and held that par. 5 (c) constituted no defence in law to the claim made by the second respondent. Accordingly, he struck out the defence. Pursuant to special leave the appellant now appeals to this Court against the order striking out its defence. (at p309)

8. The issue is by no means a novel one. It has arisen in many cases since the first quarter of the nineteenth century, beginning with Young v. Grote (1827) 4 Bing 253 (130 ER 764) and ending for present purposes with Macmillan (1918) AC 777 . As we shall see, the difference in the approach taken by this Court and the Privy Council in Marshall on the one hand and that taken by the House of Lords in Macmillan turns very largely on the correctness of Young v. Grote and the effect of the House of Lords decision in Scholfield v. Earl of Londesborough (1896) AC 514 . Both this Court and the Privy Council in Marshall distinguished Young v. Grote, thinking that its authority had been drastically curtailed by Scholfield. However, in Macmillan it was unanimously declared that Young v. Grote was correctly decided and that its authority was not confined by Scholfield, the House of Lords concluding that Young v. Grote was correct in principle and that it was supported by a powerful body of authority and by policy considerations. (at p309)

9. For these reasons, if for no other, it seems that the best approach to the problem is to begin at the beginning, that is, with Young v. Grote. In that case Y., a customer of a banker delivered to his wife printed cheques signed by himself, but with blanks for the sums, requesting his wife to fill the blanks up according to exigency of his business. She caused one to be filled up with the words "fifty pounds" and the figures "2s. 3d.", the "fifty" being commenced with a small letter, and placed in the middle of a line; the figures 50.2.3. were also placed at a considerable distance from the printed pound sign. In this state she delivered the cheque to her husband's clerk to receive the amount. He inserted at the beginning of the line in which the word "fifty" was written, the words "Three hundred and", and the figure "3" between the pound sign and the "fifty". The banker having paid the 350.2.3. pounds it was held that the loss must fall on the customer. (at p310)

10. The judgments of the Court of Common Pleas have generated great controversy as to what was the ground of the decision. Best C.J. said (1827) 4 Bing 253, at p 258; (130 ER, at p 766) "if it be the fault of the customer that the banker pays more than he ought, he cannot be called upon to pay again". He quoted Pothier's statement that, if a banker has been led into error by the fault of a drawer, the drawer not having taken care to write his letter of mandate so as to prevent falsification, for instance if he wrote in figures the sum drawn by the letter and someone added a zero, the drawer would be bound to indemnify the banker for the loss he had sustained, The other members of the Court were not so explicit. Burrough and Gaselee JJ. found that Y. was bound to bear the loss because he was guilty of negligence. Park J. alone of the four judges, though agreeing that the drawer was guilty of negligence, put the decision on another ground, saying that Y. left the cheques to be filled up by his wife and when filled up by her, they became his genuine orders. It seems that the majority decided the case on the ground that Y. had delegated the drawing of the cheque to his wife and that she was guilty of negligence in drawing the cheque in such a way as to facilitate the fraudulent alteration of the amount of the cheque which would not have been made but for the careless manner in which the cheque was drawn. So understood, the principle according to which the case was decided stands as an apparent exception to the general rule that the banker is only entitled to make debits to the customer's account in accordance with the customer's authority. (at p310)

11. In the cases which followed there was much discussion as to what was the precise ground of decision in Young v. Grote. The discussion invariably proceeded on the footing that the case was correctly decided. As Lord Finlay L.C. noted in Macmillan (1918) AC 777, at p 795 , the correctness of the decision was accepted by judges of great distinction, notably Parke B., Pollock C.B. and Lord Cranworth L.C. The cases in which Young v. Grote was accepted were examined in detail by Lord Finlay L.C. in Macmillan. There is no point in our repeating that examination here. It is sufficient for us to say that various views were expressed as to the true foundation of the doctrine. Some said that it is but an instance of the general principle that as between two persons, he whose negligence enabled the fraud to be committed must bear the loss (Ex parte Swan (1859) 7 CB (NS) 400, at p 440 (14) ER 871, at p 887) ; Mayor, Constables, &Company of Merchants of the Staple of England v. Governor and Company of the Bank of England (1887) 21 QBD 160, at p 167 ; London and South Western Bank v. Wentworth (1880) 5 Ex D 96, at p 105 ). Some thought that the drawer is estopped by his negligence from disputing the authority of the banker to pay (Bank of Ireland v. Trustees of Evans' Charities (1855) 5 HLC 389, at pp 413-414 (10 ER 950, at p 960) ; Orr &Barber v. Union Bank of Scotland (1854) 1 Macq 513, at p 523 ; Ex parte Swan (1859) 7 CB (NS), at pp 431-432 (141 ER, at p 884) ; contra Earl of Selborne L.C. in Bank of England v. Vagliano Bros. (1891) AC 107, at p 126 ). Others asserted that the payment is allowed so as to avoid circuity of action, the customer being liable to the bank for his negligence (Swan v. North British Australasian Co. (1863) 2 H &C 175, at pp 189-190 (159 ER 73, at p 79) ). And Parke B. in Robarts v. Tucker (1851) 16 QB 560, at p 580 (117 ER 994, at p 1002) considered that a person who drew a cheque in blank gave "authority to any person in whose hands it was to fill up the cheque in whatever way the blank permitted". (at p311)

12. It was in 1873 that discordant voices first expressed the view that the maker of an instrument was under no duty not to facilitate a forgery. In Societe Generale v. Metropolitan Bank Ltd. (1873) 27 LT (NS) 849 , a case of fraudulent alteration of foreign bills, the Court of Common Pleas held that the defendant indorser was not liable on a bill in which the word "eight" had been written in a blank before the word "days" and subsequently, after the indorsement the letter "y" had been added to the word "eight", there being a space between "eight" and "days". Bovill C.J. said (1873) 27 LT (NS), at p 856 :

"Parties cannot prevent forgery being committed; they must use reasonable care not to afford opportunities for it, and if space is left for a word or a figure to be introduced, and if such word or figure is introduced, I cannot think that a jury would come to the conclusion that the maker of the instrument in its original form would be guilty of negligence."

Brett J. said (1873) 27 LT (NS), at pp 857-858 :

"I not only protest that there was no negligence, but say that no judge ought to leave to the jury the fact as evidence of negligence. But there is no duty on anyone to suppose that those, against whose character there is no imputation, will commit forgery whenever the opportunity arises."

Later in Baxendale v. Bennett (1878) 3 QBD 525 a case involving the acceptance of a bill in blank, the acceptor having authorized the drawer to fill in his name as drawer, Brett L.J. (1878) 3 QBD, at pp 533-534 thought that the authority of Young v. Grote (1827) 4 Bing 253 (130 ER 764) had been undermined by the observations made in Bank of Ireland v. Trustees of Evans' Charities (1855) 5 HLC 389 (10 ER 950) . Subsequently as Lord Esher M.R. in Scholfield in the Court of Appeal (1895) 1 QB 536, at p 543 he described Young v. Grote as "the fount of bad argument" and the other member of the majority Rigby L.J. (1895) 1 QB, at p 556 considered that the principle of Young v. Grote should not be followed. (at p312)

13. It was in the light of this history that the House of Lords gave its decision in Scholfield (1896) AC 514 . There a bill for 500 pounds was presented for acceptance with a stamp of a much larger amount than was necessary and with spaces left. The acceptor wrote his acceptance and handed the bill to the drawer, who fraudulently filled up the spaces and turned it into a bill for 3,500 pounds. It was held, affirming the Court of Appeal, that the acceptor owed no duty of precaution to the plaintiff, a bona fide holder for value, and was guilty of no negligence. Lord Halsbury L.C. considered that the doctrine that "giving opportunity for forgery" affects the validity of the forged instrument formed no part of English law. He rejected the principle enunciated by Pothier and appears to have concluded that Young v. Grote was wrongly decided. He said (1896) AC, at p 532 :

"My Lords, this very case has in almost precisely similar circumstances been already decided in the Adelphi Bank v. Edwards (Not reported; the facts, the decision and the grounds thereof are stated in the judgment of Lord Watson (1896) AC, at p 540 ), and I regret very much that that case has not been reported. I entirely concur with what Lindley L.J. said in that case, that it was wrong to contend that it is negligence to sign a negotiable instrument so that somebody else can tamper with it; and the wider proposition of Bovill C.J., in a former case, Societe Generale v. Metropolitan Bank (1873) 27 LT (NS) 849, at p 856 , that people are not supposed to commit forgery, and that the protection against forgery is not the vigilance of parties excluding the possibility of committing forgery, but the law of the land."

It is noteworthy, however, that of their Lordships who constituted the House of Lords on this occasion, the Lord Chancellor was alone in his dissatisfaction with Young v. Grote (1827) 4 Bing 253 (130 ER 764). Lord Watson stated that the doctrine of Pothier had no application outside the relationship of banker and customer (1896) AC, at pp 534-539 . He accordingly distinguished Young v. Grote. Lord Shand and Lord Davey were of the same opinion. The other members of the House distinguished Young v. Grote. Not all the Law Lords appear to have appreciated that there is a contractual relationship between the drawer of a cheque and his paying bank which imposes on the drawer a duty of care to that bank and that this relationship distinguishes the drawing of a cheque from the acceptance of a bill. (at p313)

14. Unlike Scholfield, Marshall (1904) 1 CLR 632; (1906) 4 CLR 196; (1906) AC 559 involved cheques and the relationship between banker and customer. In Marshall the plaintiffs brought an action to recover a balance in their account with the defendants. The defence was that there was no balance, five cheques having been drawn by the signatories to the account which, when paid, were for sums which in the aggregate amounted to the balance sought to be recovered by the plaintiffs. The plaintiffs were not familiar with accounts and left the clerical work in connexion with the estate to their co-executor who filled out the cheques in his own handwriting and sent them to the plaintiffs for signature. After the cheques had been signed by the plaintiffs their co-executor fraudulently altered them to larger amounts and obtained the full amounts from the defendant. He was enabled to do so by reason of the circumstance that the cheques when initially drawn left a space between the pound symbol and the first figure appearing thereafter and left a space before the commencement of the statement of the amount in writing. (at p313)

15. Griffith C.J. who delivered the judgment of this Court acknowledged that as the relationship of banker and customer was contractual there was an implied mutual obligation on each party not to do anything which would hamper the other party in performing the contract or would delay him in performing it. (at p313)

16. The question for decision was therefore whether there was evidence of breach of duty. On this aspect of the case Griffith C.J. rejected the proposition that Young v. Grote (1827) 4 Bing 253 (130 ER 764) affirmed the doctrine of Pothier that if the banker has been led into error by the fault of the drawer, the drawer not having taken care to write the draft in such a manner as to prevent falsification, the drawer must indemnify the banker. He thought that the judgments did not support this view and that each of the judges relied on other circumstances as establishing the default of the drawer. He noted that the authority of Young v. Grote had been confined, especially by Scholfield v. Earl of Londesborough (1896) AC 514 to the proposition that the drawer of a cheque may, by his negligence in connexion with drawing it, disentitle himself to complain that the banker has paid a larger sum upon it than the drawer intended (1904) 1 CLR, at pp 651-652 . The Chief Justice went on to say (1904) 1 CLR, at p 660 :
". . . authority cannot be inferred merely from the existence of blank spaces in the document. It may well be that the existence of blank spaces, combined with other circumstances, either intrinsic to the document or extrinsic, may be evidence of delegated authority to fill them up. But the mere existence of a blank is not sufficient." (at p314)

17. In affirming the decision of the High Court the Judicial Committee (1906) 4 CLR 196; (1906) AC 559 held that Scholfield was the governing authority not Young v. Grote. Like the High Court, their Lordships considered that the authority of Young v. Grote had been confined by Scholfield. They acknowledged that the contractual relation existing between a banker and his customer differentiated the case from that of the acceptor and the holder of a bill. Yet they thought that the duty that subsists between customer and banker is substantially the same as that which exists between the acceptor and the holder of a bill, though they declined to offer an abstract definition of the duty. Sir Arthur Wilson, who delivered the judgment of the Judicial Committee, having quoted the penultimate paragraph in the speech of the Lord Chancellor in Scholfield - the paragraph which we have set out earlier - went on to enunciate (1906) 4 CLR, at p 201; (1906) AC 559, at p 568 "the proposition that, whatever the duty of a customer towards his banker may be with reference to the drawing of cheques, the mere fact that the cheque is drawn with spaces such that a forger can utilize them for the purpose of forgery is not by itself any violation of that obligation." (at p314)

18. With great respect, we think that several criticisms must be made of the judgments, both in this Court and in the Privy Council, in Marshall (1904) 1 CLR 632; (1906) 4 CLR 196;(1906) AC 559 . Those judgments clearly were influenced by the speech of the Lord Chancellor in Scholfield, and it does not appear to have been appreciated that Lord Halsbury's views were not shared by the other members of the House. In the first place, those judgments did not acknowledge that the contractual relationship between customer and banker distinguished the drawing of a cheque from the acceptance of a bill of exchange, and consequently failed to give effect to the important consequences of the distinction. The existence of the contractual relationship which is the foundation for imposing a duty on the customer in relation to the drawing of his cheque is absent in the case of the acceptor of a bill. In the second place, the judgments failed to recognize that the decision in Young v. Grote had been followed in many cases and that the principle that the drawer of a cheque was guilty of negligence vis-a-vis his banker in so drawing a cheque as to facilitate forgery had been accepted in many cases. It is right to say that there was a long-standing controversy as to the precise effect of the decision in Young v. Grote (1827) 4 Bing 253 (130 ER 764) but that controversy, as we have seen, related to the theoretical basis for the doctrine, not to the existence of the doctrine itself. In the third place, the judgments support the view expressed by Bovill C.J. and Brett J. in Societe Generale (1873) 27 LT(NS) 849 , and by the Lord Chancellor in Scholfield, that it is not the duty of a drawer of a cheque to guard against the possibility of a forgery, that this is a matter best left to the criminal law. This view does not conform to modern notions of the duty of care and the standard of care expected of the reasonable man. It is now well settled that the reasonable man should in appropriate circumstances take account of the possibility that others will break the law and act accordingly. (at p315)

19. Subject to some qualification these criticisms form the main thrust of the speeches in Macmillan (1918) AC 777 . To them we should add three comments. One is that it seems fair as between banker and customer that the customer should bear responsibility for the loss when it is his careless drawing of the cheque that facilitates that loss through forgery. No heavy burden is placed on the drawer. He is merely required to exercise care when drawing the cheque. The second comment is that the Marshall view imposes a considerable burden on bankers without their having any very satisfactory means of protecting themselves. The Macmillan view promotes the negotiability of cheques by affording banks, which have to determine the authenticity of many cheques in a short period of time, the assurance that the drawer by his negligence may not increase the risk of loss through fraudulent alteration without being responsible for the consequences. The final comment is that there is no convincing distinction between a case where the careless drawing of the cheque facilitates loss by fraudulent increase in the amount of the cheque and the case where the customer draws his cheque in blank and his agent exceeds his authority by filling in a cheque for a larger amount than that authorized by the drawer, in which event the drawer is responsible - see the speech of Lord Shaw of Dunfermline in Macmillan (1918) AC, at pp 826-827 . (at p316)

20. It is significant that in other jurisdictions the principle enunciated by Macmillan has been adopted. The existence of the duty on the part of the drawer of a cheque has been affirmed in Canada (Will v. Bank of Montreal (1931) 3 DLR 526, at pp 531-535 ; Kilburn v. Co-op Centre Credit Union Ltd. (1972) 33 DLR (3d) 233, at pp 239-241 ); in New Zealand (National Bank of New Zealand Ltd. v. Walpole &Patterson Ltd. (1975) 2 NZLR 7 ); in India (Tanjore Permanent Bank Ltd. v. S.R. Rangachari (1959) AIR (Madras) 119 ; Joydeb Das v. National Bank of India Ltd. (1961) 65 Calcutta WN 282 ); in Sri Lanka (Kulatilleke v. Mercantile Bank of India (1957) 59 (Ceylon) NLR 190 ); in South Africa (Standard Bank of S.A. Ltd. v. Kaplan (1922) CPD 214, at p 222 et seq ; Barclays Bank D.C.O. v. Straw (1965) (2) S.A. 93, at p. 95 et seq. ). In the United States of America the existence of a similar duty has been generally, but not universally, acknowledged though in some instances the rule has been affected by statute (Reiter v. Western State Bank of St. Paul (1953) 42 ALR (2d) 1064, at pp 1068-1069 ; Annotations 42 A.L.R. (2d) 1070; 67 A.L.R. (3d) 144, at p. 149; J. Timothy White, "The Scope of the Depositor's Duty to Prevent and Discover Alterations &Forgeries of his Checks", Vanderbilt Law Review, vol. 16 (1963), p. 1201). (at p316)

21. Macmillan dealt with the drawing of a cheque in such a manner as to facilitate by forgery an increase in the amount for which it was drawn. The judgments contain nothing which restricts the duty or its scope to the possibility of loss by such means, that is, the filling in of gaps created by the manner in which the amount has been written in words and figures. But there is no occasion to pursue the question whether the duty of care extends to the drawing of a cheque in such a manner as not to facilitate a fraudulent alteration in the name of the payee, a question of the kind that arose in Slingsby v. District Bank Ltd. (1932) 1 KB 544 . We have merely to decide whether the primary judge was correct in following Marshall in preference to Macmillan, a matter which he determined as a question of law at the threshold of the case. The primary judge was, of course, bound to follow Marshall. We are at liberty to depart from it. For the reasons already given the principle enunciated in Macmillan is to be preferred to that stated in Marshall. (at p317)

22. The question of law submitted for determination by this Court may be answered by saying that, arising from the contract between banker and customer, there is a duty upon the customer to take usual and reasonable precautions in drawing a cheque to prevent a fraudulent alteration which might occasion loss to the banker. (at p317)

23. Whether the respondent was in breach of its duty by neglecting some usual and reasonable precaution in the drawing of the cheques is a question of fact and is one of the issues to be determined by the tribunal of fact. (at p317)

24. We would allow the appeal and remit the matter to the Supreme Court. (at p317)

MURPHY J. The question is whether a bank customer who (innocently) draws a cheque so negligently as to facilitate a forgery should be liable for loss to the bank caused by the forgery. The answer involves issues of precedent, modern theories of negligence, and social policy. The precedent, which bound the trial court, is that in Marshall v. Colonial Bank of Australasia Ltd. (1904) 1 CLR 632; (1906) 4 CLR 196; (1906) AC 559 , in which the Privy Council affirmed the decision of this Court, that the drawer is not liable. That decision is out of line with modern developments of general principles of care applicable in tort and contract. (at p317)

2. In terms of social policy, there is a real question whether it would be better to let the loss continue to fall on the banking industry. Although the standard of care habitually observed by cheque drawers may fairly be described as low, I am not satisfied that any considerable burden has been imposed on banks by the application of the Marshall decision. If in practice, the losses, which to individual bank customers would be onerous, are cumulatively only slight for the banking system in comparison with the vast amount of business done by cheque, a sensible system of loss spreading would be to continue as before. Further if the cumulative losses are now slight, it would be absurd to impose a standard of care such that every drawer of cheques would have to regard employees and associates as potential forgers. However, this branch of the law can be brought into harmony with other areas (and with the law on this subject in other countries) and undesirable social consequences also avoided, by adoption of a standard of care which would not require us to turn into a suspicious society. (at p318)

3. The Marshall Case should be overruled, and in accordance with modern doctrines of care, the negligent drawer should be liable, but no high standard of care should be required. I agree with the proposed order. (at p318)

Orders

Appeal allowed.

Order of the Supreme Court of New South Wales (Common Law Division) answering the preliminary question of law set aside.

By consent, the appellant to pay the first respondent's costs of the appeal to be taxed.

Remit the matter to the Supreme Court of New South Wales to be dealt with in accordance with the judgment of this Court.