National Australia Bank Ltd v Nemur Varity Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL Not Restricted

No.10751 of 1992

NATIONAL AUSTRALIA BANK LTD.	Appellant
v
NEMUR VARITY PTY. LTD.	Respondent

---

JUDGES:	PHILLIPS, CALLAWAY and BATT, JJ.A.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	14, 15 and 16 May 2001
DATE OF JUDGMENT:	1 March 2002
MEDIUM NEUTRAL CITATION:	[2002] VSCA 18

---

BANKING – Damages – For bank’s breach of duty and conversion - Bank’s duty of care as regards customer’s cheques and transfers – Whether duty solely contractual - Claim by customer for consequential loss from breach of duty and conversion of cheques – Whether causation proved – Whether loss too remote.

TORT – Conversion – Remoteness of damage – Test for.

---

APPEARANCES:

Counsel

Solicitors

For the Appellant

Mr. J.H. Karkar, Q.C.
with Mr. A.T. Schlicht

Russell Kennedy

For the Respondent

Mr. D.J. Williams

with Mr. S.V. Palmer

The Law Offices of Barry Fried

PHILLIPS, J.A.:

I have had the considerable advantage of reading in draft the judgment prepared by Mr. Justice Batt. The wrongdoing of the Bank was not in issue on this appeal; nor was it in issue that the Bank was therefore liable to Nemur Varity for the face value of the four NAB cheques and the amount of the TT cheque (as those expressions are used in his Honour's judgment). But beyond that, his Honour has concluded, the Bank was not liable to Nemur Varity because the latter did not demonstrate that the additional loss for which it was claiming was caused by the Bank’s handling of those four NAB cheques or the TT cheque and because such additional loss, if so caused, was too remote. The loss in question was of two types: net loss of business income and the face value of the ANI cheque drawn on 13 December 1989.

On one view therefore the result of this appeal can be rested on principles of both causation and remoteness of damage. For myself, I prefer to rest on the former rather than the latter. To my mind it is clear that the loss now in issue was not caused by the Bank’s wrongdoing: it was the result of the fraud being practised on Nemur Varity by those to whom the four NAB cheques were delivered and for whom the amount of the TT cheque was to be transferred. In a sense, those dealings were doomed from the start because Nemur Varity was treating with a fraudster. What the Bank did might have caused the immediate loss of the amount of the cheques themselves, but any further and consequential loss was caused by the fraudster, not the Bank. To anyone knowing the true facts at the time when the cheques were drawn, those five cheques were destined never to be used, either directly or indirectly, for the payment to an insurer of premiums or the effecting of insurance.

Moreover, there are special difficulties in the way of resolving the question of remoteness on this appeal because of the assumptions upon which that question necessarily falls to be addressed. By reference to the way in which the case was argued at trial, we decided that it was too late for the Bank’s counsel to argue the

question of liability on the particular grounds which counsel sought to propound on this appeal. Accordingly remoteness of damage fell to be determined only after the making of two assumptions: first, that the Bank was liable to its customer, either in contract (as Mr. Justice Batt demonstrates) or in conversion; and secondly, that the Bank's conduct which underlay the conclusion of liability was at least a cause, not just of the direct loss which was not in question on the appeal, but also of the consequential loss which the Bank was seeking to challenge. The first of these might have been open to challenge (perhaps, for instance, over what notice the Bank had when the four NAB cheques were presented for collection at the instance of a "third party"); while the second, causation, was quite contrary to this Court's own opinion. Any question of remoteness must be a little artificial when it falls to be determined only after the making of such assumptions.

Thus, while I concur in the conclusion reached by Mr. Justice Batt and in the disposition of the appeal which he proposes, I do so because, for the reasons given by his Honour, the loss which is now under challenge was not in my opinion caused by the Bank. Certainly, as at present advised I incline generally to the views taken by Batt, J.A. with respect to remoteness of damage, and in particular his opinion that reasonable foreseeability is not the appropriate test in the case of conversion. If, however, the true test depends rather more upon notice or knowledge (as his Honour opines), it may be that the formulation of the test as propounded by Mr. Justice Callaway will turn out to be more durable than the actual words used in France v. Gaudet[1]. But because I see no need to decide the matter of remoteness on this occasion, I say no more about it, reserving any final decision on it until a case arises in which it must be resolved.

CALLAWAY, J.A.:

[1](1871) LR 6 QB 199 at 205, quoted by Batt, J.A. in para.[57].

I gratefully adopt the statement of facts and issues in the reasons for judgment prepared by Batt, J.A. They enable me to state my own reasons briefly.

The loss occasioned by the conversion of the four NAB cheques was their face value. The loss against which the precautions that the appellant should have taken were directed was misapplication of the cheques or the sums they represented. (To put it simply, a bank makes inquiries on presentation by a third party to check that the money is going to the right person.) Similar considerations apply in relation to the telegraphic transfer. Loss of past or future business by a bank’s customer and loss caused by the customer’s drawing of another cheque because fraud has not been discovered are quite different. There may be a sense in which they were caused by the appellant’s defaults, but they were incidental rather than consequential losses, at least in some respects like the loss unsuccessfully sued for in Gorris v. Scott.[2]
[2](1874) L.R. 9 Ex. 125. That was a case about breach of statutory duty, but similar considerations apply. Cf. Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co. Ltd. [1997] A.C. 191 at 212C and 213C-D and Kenny & Good Pty. Ltd. v. MGICA (1992) Ltd. (1999) 199 C.L.R. 413 at [55].

That is not to say that liability for the conversion of a cheque is always limited to its face value or that liability for failure to take care with respect to a cheque or a telegraphic transfer cannot extend to consequential loss. It is only to say that loss of business and the drawing of another cheque are outside even the penumbra of liability.[3] Whenever a bank converts a cheque which it knows has been drawn in the course of a business, there is a risk of causing harm to the business over and above the value of the cheque. So, too, whenever a bank is careless in the ways that the appellant was. There is nothing special about the facts of this case that would make these losses recoverable.
[3]It is worth remembering that the former loss is at two removes: the clients are uninsured and in consequence the respondent’s business suffers. The drawing of the ANI cheque is even more remotely connected with the fate of the NAB cheques and of the sum represented by the telegraphic transfer.

Taking the view that the alleged consequential losses (past and future business and the ANI cheque) were but incidental, it is unnecessary for me to decide whether the respondent’s claims fail as a matter of causation or of remoteness. Some would say that, because the losses were only incidental, they were not caused as a matter of fact and common sense by the appellant’s defaults; others would say that, whether or not they were so caused, they were not the kinds of loss to which the measure of damages extends.[4] What I say in the next paragraph is therefore obiter[5], written out of respect for counsel’s arguments and the reasons of the other members of the Court. It suggests that the second view may be preferable.
[4]Cf. Kenny & Good Pty. Ltd. v. MGICA (1992) Ltd at [54].
[5]The views expressed in the next paragraph make my conclusion all the more likely to be right, but that is all. Even if they were wrong, I should still say that a bank is not liable in circumstances such as these.

I agree with Batt, J.A. that, putting statute and equity to one side, the duties of a bank to its customer with respect to cheques and telegraphic transfers lie in contract and not in tort. The relationship is too complex, and affected by settled commercial expectations, to be subverted by negligence. I also agree with his Honour that the measure of damages for consequential loss in conversion is not reasonable foreseeability. Liability in conversion is strict: like liability for breach of contract, which is also strict[6], it lies at the opposite end of the spectrum from deceit and is quite unlike negligence. The ordinary measure is the value of the chattel and consequential damages require some knowledge (or express notice) on the part of the defendant of facts whereby additional loss of the relevant kind is likely[7] to result. To put the point another way, the consequential loss must be of a kind that should have been within the contemplation of the defendant as a likely consequence having regard to the defendant’s knowledge (or express notice) of the facts. There is, to that extent, a closer analogy with damages for breach of contract than with damages for negligence.[8] The dicta in France v. Gaudet[9] were well founded.[10]

[6]Of course a contract may oblige a party to exercise reasonable care but, if the party does not do so, it is liable because it has broken its promise, not because of moral fault and not because of breach of any duty of care imposed by the law on a person who disregards the interests of his or her neighbours.

[7]I use “likely” in the same way as Lord Reid in C. Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350 at 385F.

[8]One difference is that the knowledge or notice is at the time of the conversion.

[9](1871) L.R. 6 Q.B. 199 at 205.

[10]It will be apparent, however, that I do not take them literally, as Batt, J.A. does at [69]. That is why I have endeavoured to express the test in my own words.

For these reasons I, too, would allow the appeal and limit the respondent’s damages to the face value of the NAB cheques and the amount of the telegraphic transfer together with interest. I agree that the appellant should have leave to amend paragraph 13 of its notice of appeal to add a reference to the ANI cheque but that it should not be permitted to challenge the respondent’s entitlement to recover damages and interest in its own right.

BATT, J.A.:

Introduction

This is an appeal from the judgment given by a judge of the Trial Division in favour of the respondent plaintiff Nemur Varity Pty. Ltd. (“Nemur Varity”) against its banker, the appellant defendant National Australia Bank Limited (“the Bank”), in the sum of $590,915 together with damages in the nature of interest in the sum of $309,595, a total of $900,510.

Nemur Varity sued the Bank on various causes of action. His Honour rejected the claims on several of them, but found that:

(a)the Bank, as collecting bank, had converted four cheques (“the NAB cheques”) for amounts totalling $115,390.15 drawn by Nemur Varity on its account with the Bank at the Shepparton branch which were made payable to Reinsurance Co. of America (“RCA”) or bearer, crossed and marked “not negotiable”, and were collected by the Bank to the credit of the account of International Insurance Exchange Pty. Ltd. (“IIE”) with the Bank;
(b)contrary to Nemur Varity’s instructions to the Bank to transfer telegraphically an amount of $86,722.40 to RCA, supported by a cheque for that amount drawn by Nemur Varity on its account with the Bank at Shepparton ("the TT cheque"), the Bank had effected the transfer of that amount to the account of IIE; and
(c)the Bank had breached a duty of care owed to Nemur Varity, both as paying bank, in view of its omissions in relation to the NAB cheques, and in making

the telegraphic transfer.

His Honour awarded damages as follows:
(a) for conversion of the NAB cheques, the face value thereof, being $115,390.15;
(b)for negligence in transferring funds to IIE contrary to instructions, the sum of $86,722.40; and
(c)for the “default” of the Bank (being the conversion of the NAB cheques and its negligence in making the telegraphic transfer) –
(i)$74,293.21, being the amount of a cheque (“the ANI cheque”) drawn by Nemur Varity on 13 December 1989 in favour of Australian National Intermediaries Pty. Ltd. (“ANI”) or bearer, which was collected by the Australia and New Zealand Banking Group Ltd. (“the ANZ Bank”) for ANI and paid by the Bank; and
(ii)the amount of $314,510 for net loss of past and future business income; as well as

(d) for interest, the sum of $309,595.
The issues on appeal

On the hearing of this appeal the Bank sought to challenge his Honour’s conclusions:

(a)that the Bank, as collecting bank, converted the NAB cheques by collecting them for IIE;
(b)that the Bank, as paying bank, owed the duty of care postulated by his Honour;
(c)that the Bank, as paying bank, breached any duty of care owed by it to Nemur Varity;
(d)as to causation and assessment of Nemur Varity’s loss, the latter aspect raising both remoteness and computation; and
(e)as to Nemur Varity’s entitlement to judgment beneficially rather than as trustee for its clients.

In opening the appeal for the Bank Mr. Karkar put to the court as the appellant’s case on liability two submissions, the first of which he acknowledged had not been put to the trial judge and the second of which he said “might involve” a new argument, which he shortly thereafter stated had not been put below. The first submission related to the question of conversion and propounded as the arrangement pursuant to which Nemur Varity delivered the NAB cheques to ANI, one which was of a different kind from that on which the trial had proceeded but which was said to be open on the evidence and by reason of which, it was claimed, it could be concluded that Nemur Varity had in fact conferred on the Bank authority to deal as it did with the NAB cheques. This had not been pleaded in the defence and was not stated in the grounds of appeal, let alone specifically stated as required by Rule 64.05(1). Moreover, it raised matters of fact on which it could not be said that further evidence might not have been led had the point been raised below. The second submission was that in considering whether there was a breach of duty by the Bank as paying bank it was necessary, where, as here, the same bank was both the paying bank and the collecting bank, to treat each branch as a separate entity. Again, not only had this not been put to the judge below, as para.141 of his Honour’s reasons makes clear, but it was not stated, let alone specifically stated, in the grounds of appeal and the possibility that evidence, at least of an expert kind, could have been led on the question cannot be excluded. After hearing argument on whether the Bank should be allowed to ventilate the two submissions for the first time on appeal, the court ruled that it should not. The reasons for that ruling appear from what has just been said about the two points. I merely add that the ruling is supported by such leading cases as Coulton v. Holcombe[11] and Geelong Building Society (in liq.) v. Encel[12].
[11](1986) 162 C.L.R. 1.
[12][1996] 1 V.R. 594 at 603-609 and 609-613.

Immediately after that ruling Mr. Karkar moved to argue damages. Although later, in advancing his argument on damages, he sought to debate whether there had been a breach of duty, either in contract or in tort, in paying the NAB cheques and Mr. Williams responded, it was indisputable that the appeal had become confined to challenges (d) and (e) enumerated in para.[13] above.[13] That liability had ceased to be in issue is confirmed by the agreement to the varying of the stay I now mention. It became apparent to the court that, liability no longer being in issue, there was no basis for challenging his Honour’s judgment so far as it awarded Nemur Varity the amount of the face value of the NAB cheques and the TT cheque and that the stay of execution of the judgment below which had been granted by Tadgell and Chernov, JJ.A. on 15 October 1999 should be lifted in part - that is, to the extent of that face value and an appropriate amount for interest thereon. When at the conclusion of argument Mr. Karkar accepted that to that extent there was no good reason for the stay to remain, the parties were asked to agree on the appropriate sum and ultimately, on 8 June 2001, the court varied the order of 15 October 1999 so that execution was stayed to the extent only of $526,112.45.
[13]As appears below, the Bank did dispute that its duty of care arose at common law.

The facts

The essential facts so far as material to the issues remaining in the appeal are as follows. Nemur Varity carried on business in Shepparton as an insurance broker, specialising in truck insurance. It commenced banking with the Bank on 13 October 1986, after three meetings between Mr. Trevor Jarman for Nemur Varity and Mr. Len Carey for the Bank, at which Jarman’s wife and mother were also present. His Honour found that at the meetings Carey told Jarman that the Bank had set up a special scheme for insurance brokers in consultation with its lawyers, that the scheme was specially designed for the insurance broking industry and complied fully with the banking requirements of the legislation, that interest would be earned on the insurance premium broking account, that the bank was soliciting business from other insurance brokers, and that it sought an opportunity to quote for Nemur Varity’s business. The accounts which Nemur Varity opened with the Bank included one titled “Premium broking account”.

In 1984, Jarman had come to know, and to do business with, James Charge, who was then operating an underwriting agency through a company known as European Underwriting Agency Pty. Ltd. (“EUA”), which later changed its name to Australian National Intermediaries Pty. Ltd. Jarman understood, as was the fact, that Charge, through EUA and later ANI, acted as agent for a number of Lloyd’s underwriters. Jarman had checked “through Canberra” that ANI had facilities in London. From time to time thereafter Nemur Varity placed with ANI insurance business of various kinds, but principally personal insurance. The judge described the amount of this business as “modest”. Jarman said in evidence that he had no problems with claims on insurances placed with ANI. He had visited ANI’s offices and had seen paperwork from many insurance broking firms there. Nemur Varity earned ten per cent commission on business placed through ANI.

Late in 1988 the insurances for Nemur Varity’s largest client, Roccisano Transport Pty. Ltd. (“Roccisano”), fell due for renewal. Jarman placed that insurance through ANI with a Wisconsin corporation called Commercial Guarantee Insurance (“CGI”). Charge told Jarman that CGI had arrangements with Lloyd’s. The premium of over $450,000 for this insurance was paid by Nemur Varity to ANI in three instalments by cheques dated 12 January, 10 February and 10 March 1989 made payable and sent to ANI. The policy for the Roccisano insurances was received by Nemur Varity on 21 September 1989. Upon receipt, Jarman noticed, as he had learned in March or April 1989 would be the case, that the insurer was not CGI but Reinsurance Co. of America Inc. In the meantime, claims were made on the new policy and were met.

In 1988 Charge had proposed to Jarman that they pool their resources to market truck insurance widely. Initially, Charge suggested that the business be placed with a company called Victoria Insurance. Jarman declined the proposal because it was a fairly new company with limited reinsurance and security available. Subsequently, in about March 1989, Charge suggested that the truck insurance business be placed with a United States insurer, RCA. Charge informed Jarman that he had a new facility with RCA, and that he was interested in developing the truck insurance market with that company. He said that he was putting a proposal to buy RCA. Charge gave Jarman an extract from Best’s Guide and Jarman made his own checks of that guide. Charge gave Jarman details of RCA’s reinsurance arrangements for Australian risks, particularly catastrophe insurance, which Jarman found satisfactory. On two occasions Jarman contacted persons he was told were RCA’s agents in New York and spoke to a Mr. Daviatian, whose name was given to Jarman by Charge. Daviatian confirmed to Jarman what Charge had said. In the end, Jarman formed the view that RCA was a satisfactory company and he agreed to enter into an arrangement with ANI with respect to placing truck insurance business with RCA. His Honour found that, although some of the material given by Charge to Jarman to satisfy Jarman of RCA’s financial health suggested to the contrary, Jarman’s additional inquiries satisfied him that RCA was of substance.

In about March 1989, Nemur Varity and ANI entered into an arrangement by which it was agreed that a company, International Insurance Exchange Pty. Ltd., would be established, the ownership and control of which would be equally divided between Nemur Varity and ANI; that IIE would act as underwriting agent for RCA and would seek to market truck insurance widely; and that IIE would earn 25 per cent commission on business placed with RCA and this would be paid, as to ten per cent, to Nemur Varity or other broker introducing the business, and, as to 15 per cent, to IIE, which, after expenses, would be divided equally between Nemur Varity and ANI.

The arrangement was put into effect. IIE was established and it opened two accounts at the Shepparton branch of the Bank, with the Jarmans as signatories. A draft binder was prepared relating to the arrangement, which was relied upon by Jarman to authorise the issue by IIE of a number of cover notes. On 30 June 1989, Nemur Varity, acting pursuant to the arrangement, drew two cheques in favour of IIE for the total amount of $53,978.40 for premiums, net of commission, for insurances to be placed with RCA pursuant to the arrangement. These cheques were deposited in one of the IIE accounts at the Shepparton branch of the Bank on 3 July 1989. His Honour accepted Jarman’s evidence that at the time it was contemplated that IIE would be empowered to write business and settle claims. The money so deposited provided a necessary fund to settle claims and protect Nemur Varity’s clients.

The judge found that the arrangement was terminated on or shortly before 25 July 1989. By letter bearing that date, ANI wrote to Nemur Varity stating,

“[P]lease bear in mind the Binding Authority we have which precludes any other party accepting business.
Accordingly, any request to your company to cover must be referred to this office.”

The judge accepted that this letter confirmed earlier discussions terminating the arrangement in which Jarman was informed by Charge that ANI had an exclusive binder to write insurance business in the name of RCA, and that “the author of the letter was saying that any business got by the plaintiff had to be put to ANI, not IIE, for acceptance”.

On 13 July 1989, two accounts were opened by ANI officers in the name of IIE at the North Balwyn branch of the Bank, where ANI had its bank account. On 20 July, the IIE accounts at the Shepparton branch (only one of which, the premium trust account, had been operated upon) were closed at the behest of an officer or officers of ANI and, unbeknown to Jarman, the amount standing to the credit of the operating account was transferred to an IIE account at North Balwyn. On 21 July two cheques totalling approximately $48,000 were drawn on that IIE account in favour of Shepparton Motor Panels (“SMP”), a motor repairer, as payment for repairs to trucks nominally insured by RCA. His Honour inferred that Charge used IIE moneys to pay claims on RCA so as to conceal the fact that RCA was not providing insurance.

After 25 July 1989, Nemur Varity continued to place business with ANI as underwriting agent for RCA. The cheques, representing premiums for this business net of Nemur Varity’s commission, were drawn by Nemur Varity in favour of RCA or ANI and were posted to ANI’s premises at North Balwyn. On occasion, Nemur Varity paid the repairer of trucks directly out of premium income received from its clients in respect of business to be placed with RCA through ANI.

Of the cheques drawn between 26 July and 26 September 1989 five (with a total value of $202,112.55) were drawn on Nemur Varity’s account at the Shepparton branch of the Bank in favour of RCA or bearer and were crossed and marked “Not Negotiable”. Each of those cheques represented premium, net of Nemur Varity’s commission, paid by identified clients of Nemur Varity. Four of them (and these were "the NAB cheques") were posted to ANI’s office in North Balwyn in envelopes addressed to RCA. They were then deposited by persons acting for ANI in an IIE account at the North Balwyn branch of the Bank entitled “International Insurance Exchange Pty. Ltd. Premium Trust Account” and were collected accordingly by that branch for that account. One had been endorsed “pay Australian National Intermediaries” and signed apparently by one Richardson, an associate of Charge. Another had been indorsed “pay International Insurance Exchange” and apparently signed by Richardson. The fifth cheque, though similar to the other four, was dealt with differently: it was used to enable a telegraphic transfer of funds to be effected. Dated 25 September 1989, this cheque was for $86,722.40 and it was taken by Jarman or his mother to the Shepparton branch of the Bank with an application for telegraphic transfer, signed by Jarman’s mother on behalf of Nemur Varity. The application named the beneficiary as RCA and gave the number of an account at the North Balwyn branch of the Bank as the account to which the funds were to be transferred. His Honour had no doubt but that the Jarmans believed the number to be that of an RCA account but it was not. It was the number of an account in the name of IIE that had apparently been given to Jarman by ANI and in due course, an amount equal to the cheque’s face value was transferred by the Shepparton branch to the credit of that account at the North Balwyn branch.

On 13 December 1989 Nemur Varity drew the ANI cheque for $74,293.21 payable to ANI or bearer which was crossed and marked “Not Negotiable”. That cheque represented additional premium payable in respect of the Roccisano insurances. It was collected by the ANZ Bank in favour of an account of ANI maintained at that bank.

In September or October 1989, Jarman received complaints from SMP that ANI had not been paying claims made on RCA. Jarman contacted Charge and others of ANI, who said that ANI was awaiting payment from RCA. When payment was not forthcoming, Jarman paid SMP out of premiums due to RCA. Acrimonious correspondence ensued between Nemur Varity and ANI in November and December 1989. Notwithstanding this, Nemur Varity continued to place business with RCA, through ANI, of which the ANI cheque is an example.

In March 1990, Jarman went to the RCA office in New York and spoke to Daviatian, who, he said in evidence, “assured” him that “things to do with Charge were in order; but they were taking some time”. But problems with meeting claims continued. In June or July 1990, Stephen McLean from ANI telephoned Jarman. As a result of that conversation, Jarman wrote on 9 July 1990 to the president of RCA in Illinois asking whether “Mr. Charge of Australian National Intermediaries, of Australia, had operated as underwriting agents or in any effect for your company”. The reply was that “Mr. J. Charge of Australia has never placed nor even had authority to place any business with Reinsurance Company of America, Inc.”; and, as his Honour accepted, that was so. The appearance of insurance with RCA through ANI turned out to be a mere pretence: a fraud that had been practised on the Jarmans.

Detailed findings on liability

It is useful to set out the context in which the remaining issues fall to be determined. As stated earlier, the judge found that the Bank was liable for conversion of the NAB cheques, the four cheques which had been made payable to RCA and posted to ANI and were then paid and collected to the credit of IIE. In that regard the judge said in the course of his judgment:-

"129.    The plaintiff believed that it was transacting insurance business with RCA, ANI acting as a non-broking intermediary. It was its intention to act in such a way on behalf of its clients. It believed that ANI handled RCA’s business in Australia. It believed that this was done through ANI’s office, for it had no belief that RCA had either offices or staff in Australia. In drawing the NAB cheques in favour of RCA, and in sending those cheques to the ANI office in envelopes addressed to RCA it plainly exhibited its intent that the cheques be deposited to the credit of the payee. ...
130.   The plaintiff’s intention that the cheques be deposited to the credit of the insurer, ANI physically handling the cheques for that purpose, was the result of a fraud perpetrated by ANI – and particularly Charge as its personification. The plaintiff was not doing business with RCA, ANI acting as a non-broking intermediary. ANI had no business relationship with RCA...
131.   In the circumstances, the debate at trial whether the plaintiff intended ANI to courier the cheques to RCA, acting as the plaintiff’s agent in doing so, or alternatively whether ANI received the cheques as agent of RCA, seems to be beside the point. The fact is that ANI got the cheques into its hands by a fraud. On the ‘courier’ interpretation, the cheques never left the plaintiff’s possession. On the ‘insurer’s agent’ interpretation, the cheques could not be regarded as having come into the payee’s hands when they came into ANI’s hands. For ANI was not the agent of the payee.
132.   If the plaintiff had learned the true facts in respect of each cheque before it was presented, ... it could properly have demanded return of that cheque, or sought to restrain its presentation for payment. Whilst the cheques were not yet in the hands of the payee, the plaintiff remained their true owner and entitled to immediate possession of them.”

As the judge concluded a little later, when the NAB cheques were presented for collection on IIE’s account, the Bank was guilty of conversion in collecting the proceeds in favour of IIE. Although the Bank pleaded that its acts were done in good faith and without negligence (i.e. carelessness), no evidence was led in that behalf and no submissions made in support of the plea, according to the judge. The Bank, having acted inconsistently with Nemur Varity’s rights as “true owner and entitled to immediate possession”, was guilty of conversion and liable accordingly. As already explained, no challenge remains on the question of liability.

The judge found also a failure on the part of the Bank to exercise due care in relation to the NAB cheques. This was a breach of the duty owed by the Bank to Nemur Varity as its customer and it was in this connection that the judge said (in para.141):-

“It was not suggested by counsel for the defendant that the circumstances known to the bank by reason of the fact that it was [also] the collecting bank, or its conduct as collecting bank, should be excluded when considering whether it was in breach of the duty of care which it owed the plaintiff as its customer ...”.

The judge emphasised (in para.142) that the NAB cheques were each payable to an insurer and drawn on an insurance broking account, and yet were “presented for collection by a third party; a third party, moreover, which had not been properly investigated by the bank”, and that two “were endorsed (it matters not whether in law that was necessary) in a way that invited concern.” That the cheques were presented in circumstances “which required but did not get investigation” was said (in para.146) to constitute “a strong case of failure by the bank to abide its duty of care to the plaintiff by making payment in each instance”. The breach was by the Bank viewed as paying bank: the judge abstained from ruling whether the Bank, viewed as collecting bank, owed a common law duty of care to Nemur Varity.

In relation to the TT cheque, the judge found a breach by the Bank of the duty owed by it to its customer, Nemur Varity. The application for the telegraphic transfer identified the transferee as RCA, but gave an account number which was not that of RCA but of IIE. The number had been provided to Jarman by someone at ANI and, as the judge found, Jarman understood it to be an RCA account and inevitably he provided that number to his mother, who in turn gave the detail to the Shepparton branch officer. With respect to what followed, the judge said:-

“153.   Mr Harvey’s evidence shows that if the bank officer at Shepparton did what he ought to have done, the bank officer at North Balwyn must have realised that the intended beneficiary of the transfer and the account holder did not coincide. That should have sparked the enquiry and other action described by Mr Harvey. There is no evidence that any such enquiry was made. One would have expected, had there been enquiry, that the drawer would have been contacted. It was not suggested for the defendant that any such contact had been made. If it had, I am quite satisfied (compatible with other conclusions I have reached) that Jarman would not have acceded to funds being deposited in the IIE account at North Balwyn.
154.   If the officer at Shepparton conveyed only an account number, he did not do what he ought to have done.
155.   The bank called no evidence in respect of the teletransfer transaction. Counsel for the defendant made no submission seeking to justify or explain what had occurred. He described it as a matter of evidence; beyond that, he said he would not waste my time by endeavouring to deal further with it."

Not surprisingly, then, the judge found that in its handling of the telegraphic transfer the bank stood in breach of its duty to take due care.

In so concluding, his Honour said this:

"156. The evidence does not permit me to say whether there was default by the staff of the Shepparton or North Balwyn branch. But it is crystal clear that there was default. It was not suggested for the bank that it did not owe a duty to the person on whose behalf funds were being transferred to take reasonable care to ensure that the funds were deposited to the credit of the intended beneficiary. I can see no reason in principle or fact why such a duty did not exist. If the fault was that of an officer at the North Balwyn branch, it constituted a breach of that duty. If, on the other hand, the fault was that of an officer of the Shepparton branch, there was breach by the defendant of the duty of care owed by it to its customer.”
157. It may be also that if the fault was that of the North Balwyn branch it was a breach of the duty owed by the bank to its customer - the bank being a single entity on both sides of the transaction. But that need not be decided.”

As the case was argued, then, it mattered not whether that default was in the conduct of the one branch or the other, or of both.

In the result the judge concluded that Nemur Varity was entitled to be compensated for loss and damage caused by that breach of duty, adding (in para.158):-

"In the present context it would matter not whether the breach was of a contractual or tortious duty. The immediate consequence of the teletransfer was that the plaintiff’s account was debited in the sum of $86,722.40.”

Similarly, the immediate consequence of conversion of the four NAB cheques was the loss of their face value. In the case of all five cheques, the next question was that of consequential loss – and that was the aspect which remained live on this appeal.
His Honour’s reasons as to consequential loss

The consequential loss, for which the judge awarded damages, is of two types: net loss of business income (in respect of which the judge awarded the amount of $314,510 covering some 10 years’ past losses to the date of judgment and three years’ future losses thereafter) and $74,293.21, being the face value of the ANI cheque drawn on 13 December 1989 in favour of ANI and collected by the ANZ Bank. In relation to the ANI cheque, there was no “default” by the Bank in payment or collection and hence, if the amount of this cheque was to be recovered by Nemur Varity, it could only be as consequential loss by reason of some earlier default on the part of the Bank. It is convenient, however, to put aside the ANI cheque for the moment and to concentrate at first on the loss of business income, past and future.

Obviously, for the claim to succeed, it was necessary, as the judge said (in paras.178 and 200), for him to be satisfied[14] that default on the part of the Bank was at least a cause of the loss sued for, which was more particularly the loss of the business of certain clients of Nemur Varity whose premiums were the subject of the NAB cheques and the TT cheque. The relevant defaults of the defendant, his Honour said (para.201), were “the conversion of the NAB cheques by the Bank, its failure to handle those cheques as it should have been done and its mishandling of the teletransfer”, all of which resulted in the diversion of those premiums away from the intended insurer RCA and so an absence of insurance for those clients. The judge found that in consequence of the Bank's conduct Nemur Varity was “in each case left with the [erroneous] belief that the clients whose premiums had been represented by the cheques were insured with RCA” (para.202) and so took no steps to arrange real insurance for them or to tell them they were uninsured; and that “Jarman learned of the true situation on 9 July 1990” (para.203) and immediately informed the clients whose insurances fell due for renewal after that date that they were uninsured. In their case only his Honour considered it “very reasonable to infer, as a generality, that the plaintiff’s communication of the true situation was a cause of those clients abandoning dealings with the plaintiff” (para.204), for each then knew that it was uninsured, had never been insured and had paid a premium for which it had got nothing. His Honour was of opinion that “loss of business occurring in those circumstances was a loss caused by the default of the defendant, whether the matter be looked at in contract or tort” (para.206). Relevantly, that was because, as the judge saw it, the acts and omissions of the Bank served to conceal from Nemur Varity what otherwise could have been discovered, had the bank acted properly and in particular made appropriate inquiry. In elaborating his reasons his Honour said:
[14]McCracken and McCracken v Pippett and Groenwald [1999] VSCA 156 at para.11.

“206.... The plaintiff was deprived of the opportunity of preventing the misuse of the premium moneys. It was deprived of the opportunity of arranging real insurance for its clients. I am convinced that had the [defaults not occurred] (it was probably the conversion and breach of duty in respect of the first cheque that was decisive), ANI’s conduct involving the use of IIE must have come to the plaintiff’s attention. I do not doubt that ANI’s misconduct would have been laid bare.

.....

“208The probability is, as I said a moment ago, that ANI’s misconduct would have been disclosed had the defendant not been in default in respect of the first NAB cheque; that is, its misconduct would have been laid bare then and there. In that event the plaintiff would both have retained its clients’ premiums, and been able to take out real cover for its clients. Further, the premiums the subject of the other NAB cheques, and the TT cheque, would not have been put to no use. The clients would not have been belatedly informed that they were uninsured, and that their premiums had gone without anything in return. The occasion for the clients deserting the plaintiff would not have arisen. The ANI cheque would not have been drawn.”

After making his general findings on causation already set out, his Honour dealt at length and in detail with each of the clients for the loss of which complaint was made, identifying which of them gave rise to a legitimate claim from the point of view of causation and which did not, before proceeding to quantify the damages for such loss as was admissible, both past and future.

On the question of remoteness his Honour said:

“273Whether the plaintiff’s claim be viewed in contract or tort, I consider that, in the circumstances described, the loss of business was within the boundaries of compensability. Counsel for the defendant submitted that this was not so. The claimed loss, he argued, was not the natural and probable consequence of any default by his client; the loss was too remote when considered in the context of tort. He cited a number of authorities, including cases dealing with the measure of damages in conversion. The cases depended upon their own facts and circumstances.
274Counsel argued further that even if loss of business at the outset was within the boundaries of compensability, that was not so where the financial consequences were alleged to be continuing many years after the assumed default. To conclude otherwise would be to submit the defendant to an indefinite liability for an indefinite duration. That submission must be related to the facts of the particular case; and in the present case it has not persuaded me that the loss which the plaintiff has proved is outside the contractual or tortious boundary of compensability.”

His Honour did not discuss any cases on remoteness and, as can be seen, his reasons are compendious, without specific findings of (ultimate) fact on what has been said to be "in truth a question of fact". [15]

[15]Monarch Steamship Co Ltd. v Karlshamns Oljefabriker (A/B) [1949] A.C. 196 at 223, cited by Walsh, J. in Wenham v. Ella (1972) 127 C.L.R. 454 at 466.

I turn now to the ANI cheque, the face value of which, as already stated, was recovered as part of the consequential loss flowing from the defaults of the Bank in relation to the NAB cheques and the telegraphic transfer. His Honour found that the ANI cheque would not have been drawn by Nemur Varity had it been alerted earlier, in consequence of inquiry by the Bank, to the misconduct of ANI or IIE, and expressed himself as satisfied that Nemur Varity had made out a compensable loss in respect of the value of the ANI cheque (paras.181, 208 and 307). I shall consider the claim for the face value of the cheque on that basis only, for the claim for its face value as pleaded was not pursued below and Mr. Williams’ argument before us on the ANI cheque, both as regards conversion and as regards breach of duty, was directed to supporting his Honour’s reasoning and not to advancing other bases.

Causation

Causation and remoteness of damage were the major issues argued on this appeal. As both counsel informed us and is apparent from his Honour’s reasons, they were argued at some length before his Honour. With regard to causation, although counsel for the Bank challenged on appeal much of his Honour’s detailed reasoning (referred to only briefly above) about individual customers of Nemur Varity in respect of which damages were claimed, counsel submitted, on a more general level [16] and at a logically anterior point, that the loss of clients was not, as a matter of common sense, caused by the conversion or by the breach of duty in relation to the NAB cheques or the telegraphic transfer. He submitted that his Honour’s approach on causation was faulty because he had applied a “but for” test and no more, instead of common sense, the majority of the High Court having in March v. E.&M.H. Stramare Pty. Ltd.[17] rejected the “but for” test as the sole criterion of causation.[18] It was submitted that there was no evidence to support his Honour’s inference that the relevant clients left Nemur Varity because of being told that they were uninsured: no client whose business was allegedly lost gave evidence that it left Nemur Varity for that reason. Counsel submitted that none of the Bank’s defaults was a cause of clients’ being uninsured or being unaware of that fact. Rather, those things occurred because Nemur Varity had chosen to deal with ANI as supposed agent for RCA and as able to bind it. (Treating ANI simply as a non-broking intermediary, as his Honour did, the argument would be that the two things happened because Nemur Varity chose to try to deal with RCA through ANI as an intermediary). Counsel further contended that it was mere speculation whether inquiry of ANI or IIE before the latter’s account was credited and Nemur Varity's account debited would have disclosed to Nemur Varity misconduct on the part of either ANI or IIE. Thus it was urged that, had those presenting the NAB cheques for payment been asked questions by staff of the North Balwyn branch, Charge would no doubt have provided “appropriate responses”. Counsel, relying on the expert evidence of Mr. Harvey and the terms of the Bank’s internal manual, emphasized that where a third party cheque is presented for deposit, whilst inquiry may be directed by the collecting bank not only to the person presenting the cheque but also, if it wishes to establish title, to the payee, inquiry is not directed to the drawer,[19] and so, counsel said, relevant inquiry would here have been made of those perpetrating the fraud, not the victim. It was further argued that, even if it had come to Nemur Varity’s notice that the NAB cheques were not being deposited to an RCA account, it did not follow that that would have revealed Charge’s fraud, for, as his Honour found,[20] Jarman was “gullible” and “readily accepted explanations from Charge in late 1989 when a number of matters of concern arose [and] was perhaps over-ready to accept such explanations,” so that, the argument went, it was reasonable to infer that Charge would have provided a plausible explanation to Jarman. It was noteworthy that there was no evidence that any insurance claim by a client of Nemur Varity supposedly insured by RCA through ANI had not (eventually) been met. Of course, several of those submissions are not apposite on the facts to the telegraphic transfer where the mistake lay in the lack of correspondence between name and account number in the very details given to the Bank by or on behalf of the drawer of the TT cheque.
[16]I took counsel to be challenging the statement by his Honour set out earlier as to the inference which it was very reasonable to draw “as a generality”. Compare also the inference drawn by the judge in para.215.
[17](1991) 171 C.L.R. 506. See also Chappel v. Hart (1958) 195 C.L.R. 232 and Palmer Bruyn & Parker Pty. Ltd. v. Parsons (2001) 76 A.L.J.R. 163. March v. Stramare was distinguished, but not overruled, by the High Court in Henville v. Walker (2001) 75 A.L.J.R. 1410, which was decided after judgment had been reserved in this appeal. Henville v. Walker is, however, itself distinguishable from the present case in that it was a case under s.82 of the Trade Practices Act 1974 (Cth.) relating to a misrepresentation which was intended to play a critical role, and did play that role, in another person’s deciding whether or not to proceed with a course of action and which, because it was decisive, was correctly seen as causally connected with the course of action: see especially 1430, para.119, per McHugh, J. (with whom Gummow, J. agreed).
[18]In its recently reported decision in Kuwait Airways Corporation v. Iraqi Airways Co. (Nos.4 and 5) [2001] 3 W.L.R. 1117, the English Court of Appeal held that a primary judge had erred in refusing relief by way of damages for all losses flowing naturally and directly from the defendant’s act of conversion of goods which had not been physically lost or damaged. His Lordship had refused damages on the ground that the claimant had failed to show that the outcome would have been different “but for” the conversion. The Court of Appeal held that the judge had erred in applying a “but for” test as a necessary, though preliminary, criterion because conversion was a tort of strict liability. We invited, and received, written submissions from the parties on the Kuwait Airways case. Although it will be necessary to consider the case in some detail in relation to remoteness of damage, I find no need to deal with the aspect of the case summarised in this footnote. According to the Third Supplement to McGregor on Damages, 16th edn., at para.214 and elsewhere an appeal in Kuwait Airways was to be heard by the House of Lords in January 2002; but the decision of their Lordships has not yet been given.
[19]His Honour in paras.128 and 146 hypothesised inquiry of the plaintiff in relation not only to the TT cheque but also to the NAB cheques.
[20]Para.207. Counsel for the Bank was able to point to the strong example of Charge’s ability to allay Jarman’s concerns arising out of a Chicago lawyer’s letter (Ex.P40) reporting the involuntary dissolution of RCA.

For Nemur Varity, on the other hand, Mr. Williams submitted that it was not surprising that no former clients had been called to give evidence on behalf of Nemur Varity since they had lost trust and confidence in it by reason of the circumstances which emerged during 1990. Mr. Williams emphasized that Trevor Holtham, the former operations manager of Roccisano, Nemur Varity’s largest client affected, had been called to give evidence that the reason that Roccisano withdrew its insurance from Nemur Varity was “claims problems”. He submitted that the experienced trial judge had given careful and detailed consideration to the issue of causation. The questions were ones of fact. As a matter of common sense it was perfectly open to say that the losses concerned were caused by the defaults of the Bank. The real point was that, if the cheques had not been converted, the true facts would have become known to Nemur Varity and its clients at an early stage with the result that it would presumably have arranged alternative cover and would have had available to it the funds represented by the cheques in order to do so and with the further result that the “claims problems” would have been revealed for what they were, problems arising from a lack of insurance. Thus the losses in question would not have occurred. Mr. Williams then proceeded to answer the Bank’s criticism of his Honour’s reasoning in relation to the insurance business of individual clients of Nemur Varity.

The issue is whether his Honour was correct in finding that the defaults of the Bank were a cause of the loss of the business of the nine clients in respect of which damages were awarded. The resolution of that issue is by no means easy, requiring the application of a very general test frequently said to be impressionistic and to permit of value judgments. I have, however, come to the conclusion that his Honour erred in his finding as to causation. His Honour’s reasoning (as well as Mr. Williams’ argument in support of it) was largely, though perhaps not entirely, of the “but for” kind. Thus, prominent in it were expressions such as “had the conversion of the NAB cheques not taken place” (para.206) and “had the defendant not been in default ...” (para.208). His Honour spoke, too, of “the occasion[21] for clients deserting the plaintiff” (para.208, emphasis added). In my opinion, having regard to the nature of the cause propounded by Nemur Varity and the fraudulent activity forming the context in which the Bank acted or failed to act, satisfaction of a “but for” test, whilst not irrelevant, is by itself insufficient to establish causation here. Further, I consider Mr. Karkar was correct in his submission that the cause of the relevant clients’ lack of insurance and of the belief by Nemur Varity and its relevant clients that the latter had insurance cover was that Nemur Varity had chosen to deal with ANI as supposed agent for RCA and as able to bind it (or at any rate to deal with RCA through ANI). The cause in fact of Nemur Varity’s loss was the fraud. The fraud against which the Bank’s duties were designed to afford protection was fraud in the application of the cheques, not all fraud. Overall to my mind, when one stands back and reviews the decision on causation against the Bank’s defaults, a finding or inference that one or more of the defaults was a cause of the loss of business of the clients concerned is counter-intuitive and not in accord with common sense. As his Honour recognised, it is not enough that Nemur Varity lost business as a result of what he called “the RCA fiasco”. For my part, however, I do not consider that Nemur Varity proved more than that. I would accordingly uphold the challenge relating to causation.
[21]As to which, compare Kuwait Airways at 1291, para. 645.

Remoteness of damage

In case this matter should go further and out of deference to the arguments of counsel, I proceed to deal with remoteness of damage. But I necessarily do so on the assumption that I am wrong about causation. The three “defaults” considered by his Honour and enumerated earlier in these reasons fall under two causes of action, namely, the tort of conversion and breach of a duty to exercise such care and skill as would be exercised by a reasonable banker in all the circumstances. As to that duty, his Honour, referring to counsel for the Bank before him, said (para.140):

“He submitted, in effect, that it mattered not whether the duty be treated as arising in contract or at common law. There would be a different test of compensability of damage, but it should not lead to any different result in the particular case. In making those submissions, I understood him to be focussing on the position of the bank as paying bank.”

As shown later, there are different tests for remoteness according as the claim is in contract or in tort[22], and, although in certain cases there may seem little or no difference in their practical application, without meaning to pre-judge the point in any way this seems a case where, in the nature of things, different conclusions might follow depending on the test applied. What the tests are and whether the duty of care and skill was contractual or arose at common law as part of the law of negligence are pure questions of law and were fully argued on both sides. It is true that Mr. Williams made some muted complaint about the Bank’s departure on appeal from what its counsel had told the trial judge as recorded by his Honour; but he informed the court that, if there was a difference, he would rely “as a fall-back” upon a cause of action in tort with its more liberal test. In all the circumstances, I am of the view that this Court should decide the two questions and not proceed on a footing which may be inaccurate in law.

[22]Astley v. Austrust Ltd. (1999) 197 C.L.R. 1 at 23.

With regard to the test for remoteness[23], the Privy Council in Overseas Tankship (UK) Ltd. v. Morts Dock & Engineering Co. Ltd.(The Wagon Mound)[24] laid it down - and it has been accepted in Australia ever since - that the essential factor in determining liability for the consequences of a tortious act of negligence[25] is whether the damage is of such a kind or genus[26] as the reasonable person should have foreseen and not whether the damage was the direct or natural consequence of the tortious act. The Privy Council elaborated this test as regards the degree of foreseeability required in the subsequent case of Overseas Tankship (UK) Ltd. v. The Miller Steamship Co. Pty. [27], holding[28] that it was sufficient if there was “a real risk”, that is, “one which would occur to the mind of a reasonable man in the position of the [defendant]”. Foreseeability is not required of the precise manner in which the particular injury came about[29] or of its extent: see generally Fleming, The Law of Torts[30]. In Kenny & Good Pty. Ltd. v. MGICA (1992) Ltd.[31], an appeal concerning a claim in negligence by a mortgage insurer against a valuer engaged by a lending institution, McHugh, J. made the following observations, which, provided allowance is made for the special nature of a valuation[32], are helpful here:

“54.Furthermore, I do not think that the fact that the aggrieved party would not have entered into the loss-making transaction but for the negligent valuation is a sufficient ground for holding the valuer liable for the difference between the true value and sale price. The issue is not one of causation but whether the loss caused by the breach is too remote to be recoverable. In principle, the valuer is only liable for losses of a kind that were sufficiently likely to result from the breach of duty to make it proper to hold that the loss flowed naturally from the breach or that are of a kind that should have been within his or her reasonable contemplation. The valuer is not liable for every loss that flows from his or her breach of duty. Although it is true in one sense that losses from general market declines are within the reasonable contemplation of the parties to a valuation contract or arrangement, I do not think that the notion of reasonable contemplation of loss extends to such generalisations concerning the course of future events.
55.Many kinds of losses or damage that are reasonably foreseeable in a general way are outside the area of recoverability in the law of torts and the law of contract …"

[23]Chapman v. Hearse (1961) 106 C.L.R. 112 at 122.

[24][1961] A.C. 388 ("The Wagon Mound No.1").

[25]There is no such limiting requirement for intentional torts: Palmer Bruyn & Parker at 166, para.13, per Gleeson, C .J. and at 170 and 172-176, paras.54 and 63-81 per Gummow, J.

[26]Jolley v. Sutton London Borough Council [2000] 1 W.L.R. 1082 at 1091 per Lord Hoffmann.

[27][1967] 1 A.C. 617 ("The Wagon Mound No.2").

[28]At 643.

[29]Hughes v. Lord Advocate [1963] A.C. 837.

[30]9^th edn., 240-245, part of which was cited by Lord Steyn in Jolley at 1090.

[31](1999) 199 C.L.R. 413 at 437-8.

[32]In para.56 his Honour pointed out: "Valuation cases differ from other cases in that the true value of the property takes account of all factors that were reasonably foreseeable at the time of breach of duty....”

In contract, on the other hand, damages are too remote if the loss in question cannot “fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it”: Hadley v. Baxendale[33]. That statement by Alderson, B. on behalf of the Court of Exchequer has been considered, elaborated and applied in several subsequent decisions, particularly Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd.[34]; C.Czarnikow Ltd. v. Koufos[35]; and Alexander v. Cambridge Credit Corporation Ltd[36]. It may be that what seemed to be two branches of the principle stated in Hadley v. Baxendale are nowadays to be treated as one[37], amalgamating imputed and actual knowledge. As expressed by Lord Reid in Koufos[38] in a passage adopted by members of the High Court on several occasions[39], the principle is as follows:

“The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.”

In answering that question the court has to assume, though it be contrary to the fact, that the parties had in mind the breach that occurred.[40] As in tort, so in contract it is sufficient that the parties should reasonably have contemplated loss or damage of the kind suffered: Koufos[41]; Alexander v. Cambridge Credit Corporation[42]and cases there cited; Greig & Davis, The Law of Contract[43]; and Chitty on Contracts[44]. The House of Lords in Koufos made it clear that the test for remoteness in tort is more liberal than in contract[45], but the members of the House used slightly different formulations to express the degree of probability of the occurrence of the loss which is to be reasonably contemplated, such as not unlikely (Lord Reid), liable to be or at least not unlikely to be (Lord Morris of Borth-y-Gest), liable to be (Lord Hodson) and a serious possibility or real danger (Lord Pearce and Lord Upjohn).[46] The High Court has not, according to my review of its decisions[47], definitively chosen one of those formulations over the others, though McHugh, J.A., when a member of the New South Wales Court of Appeal, expressed a preference for Lord Reid’s formulation. [48] I shall for simplicity use it. However, as Walsh, J. pointed out in Wenham v. Ella[49], a contract case, the rules as to remoteness are not “rigid rules of universal application”, but rather prima facie rules which may be displaced or modified as necessary to achieve an appropriately balanced result. Scrutton, L.J. (dissenting) in The Arpad[50], anticipating Koufos, observed that the measure of damages in contract and that in tort are not the same: in contract one looks at the date of the contract to see what was contemplated by both parties[51] and of what there was notice, whilst in tort one looks at the date of the tort, when, his Lordship said, notice to the tortfeasor was irrelevant. Later cases show, of course, that the test in tort is that of the reasonable person, whether that characteristic is transferred to the tortfeasor or treated independently, and that circumstances existing at the time of breach and then known can be regarded.

[33](1854) 9 Exch. 341 at 354; 156 E.R.145 at 151.

[34][1949] 2 K.B. 528.

[35][1969] 1 A.C. 350

[36](1987) 9 N.S.W.L.R. 310 at 363-368 per McHugh, J.A. (obiter).

[37]Koufos at 383B, 384F and 385A, cf. at 421; Satef-Huttenes Albertus SpA v. Paloma Tercera Shipping Co. S.A. [1981] 1 Lloyd’s Rep. 175 at 182 per Robert Goff, J. (as his Lordship then was); The Commonwealth v. Amann Aviation Pty. Ltd. (1991) 174 C.L.R. 64 at 92; and Baltic Shipping Co. v. Dillon (1993) 176 C.L.R. 344 at 368.

[38]At 385.

[39]Wenham v. Ella at 471; Burns v. M.A.N. Automotive (Aust.) Pty. Ltd. (1986) 161 C.L.R. 653 at 667; Amann Aviation Pty. Ltd. at 99; and Baltic Shipping at 368.

[40]Chitty on Contracts, 28th edn, vol.i, 1292, para.27-044.

[41]At 382.

[42]At 365-366.

[43]At 1372.

[44]Op.cit, 1292-1293, para.27-045.

[45]At 385-386, 411, 413-414 and 422. See also Cambridge Credit Corporation at 365 per McHugh, J.A.

[46]At 388, 406, 410-411, 414-415 and 425.

[47]I do not list them all, but they include those cited by Hayne, J. in Unity Insurance Brokers Pty. Ltd. v. Rocco Pezzano Pty. Ltd. (1998) 192 C.L.R. 603 at 650 together with Amann Aviation at 92, 98-99 and 116.

[48]In Cambridge Credit Corporation at 364. In Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd. [1992] 1 A.C. 233 at 267 Lord Goff of Chieveley (with whom the other Law Lords agreed) used “a serious possibility or real danger”, but these were the words of a submission he was rejecting.

[49](1972) 127 C.L.R. 454 at 466.

[50][1934] P.189 at 201-202, 202-203, 205 and 206.

[51]Compare Unity Insurance Brokers at 627 per Gummow, J. (who in fact dissented).

There existed between the Bank and Nemur Varity a continuing or standing banker/customer contract. Accordingly, in my opinion, for the reasons which follow, the Bank’s duty of reasonable care and skill, breaches of which his Honour found to have occurred in relation to the NAB cheques and the telegraphic transfer, was purely contractual and did not arise at common law.

First, it has been held in the High Court, the House of Lords and the Privy Council, as well as final courts of appeal in other countries and intermediate appellate courts, that the duty of a customer to take usual and reasonable precautions in drawing a cheque to prevent a fraudulent alteration thereof which might occasion loss to the banker arises out of the contract between them: Commonwealth Trading Bank of Australia v. Sydney Wide Stores Pty. Ltd[52], and cases there cited; London Joint Stock Bank v. Macmillan[53]; Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd.[54] and National Australia Bank Ltd. v. Hokit Pty. Ltd.[55] per Clarke, J.A. and cases there cited. In Sydney Wide Stores[56] six justices referred to “[t]he existence of the contractual relationship which is the foundation for imposing a duty on the customer……” and later[57] said that “arising from the contract between banker and customer, there is a duty upon the customer…..”. In Tai Hing Cotton Mill Lord Scarman, delivering the judgment of the Privy Council, said[58]:

“Their Lordships do not believe that there is anything to the advantage of the law’s development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship. ……[T]heir Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis.”

It is true that these cases were concerned with the duty owed by a customer, but there is no reason in principle for thinking that the duties of a banker to its customer with respect to cheques and telegraphic transfers could be differently grounded.[59]

[52](1981) 148 C.L.R. 304, especially at 315 and 317

[53][1918] A.C. 777.

[54][1986] A.C. 80.

[55](1996) 39 N.S.W.L.R. 377 at 398–402.

[56]At 315.

[57]At 317.

[58]At 107.

[59]I put aside statutory duties and equitable obligations, if any.

Secondly, and more generally, in the last fifteen years or so there has been a deliberate trend in courts of final appeal, of which Tai Hing Cotton Mill is a specific example, to arrest on grounds of policy the expansion of the law of negligence into areas governed by contract, equity or statute: CBS Songs Ltd. v. Amstrad Consumer Electronics Plc[60](statute); Scally v. Southern Health and Social Services Board[61](contract); Downsview Nominees Ltd. v. First City Corporation Ltd.[62](equity); Hill v. Van Erp[63]; and especially Astley v. Austrust Ltd.[64], where Gleeson, C.J., McHugh, Gummow and Hayne, JJ., following Henderson v. Merrett Syndicates Ltd[65], disapproved the reasoning of Deane, J. in Hawkins v. Clayton[66] and held that the liability of a solicitor for professional negligence lay in contract as well as tort. In the course of explaining why that was so their Honours stated[67]:
[60][1988] A.C. 1013 at 1059-1060.
[61][1992] 1 A.C. 294 at 302-304.
[62][1993] A.C. 295 at 316-317.
[63](1997) 188 C.L.R. 159 at 179.
[64](1999) 197 C.L.R. 1 especially at 21-23.
[65][1995] 2 A.C. 145.
[66](1988) 164 C.L.R. 539 at 583-585.
[67]At 22.

“Rather than ask why the law should imply such a term in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of parties to the contract? The contract defines the relationship of the parties. Statute, criminal law and public policy apart, there is not reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings.”

A little later their Honours said[68]:
“The theoretical foundations for actions in tort and contract are quite separate. Long before the imperial march of modern negligence law began, contracts of service carried an implied term that they would be performed with reasonable care and skill……..The evolution of the law of negligence has broadened the responsibility of professional persons and requires them to take reasonable care and skill even in situations where a contractual relationship cannot be established. But given the differing requirements and advantages of each cause of action, there is no justification in recognising the tortious duty to the exclusion of the contractual duty.”

It is true that that case shows that professional persons are under concurrent liabilities in tort and contract, but the tenor of the first passage which I have quoted is against extending the law of negligence to relationships based in contract other than those for professional services, and in this area of discourse a banker is not a professional person.

[68]At 23.

The only case drawn to our attention in which it was stated that a banker may be sued in tort as well as in contract for breach of the duty now under consideration is the judgment of Steyn, J. (as his Lordship then was) in Barclays Bank plc v. Quincecare Ltd.[69], where his Lordship said[70]:

“……notwithstanding what was said in Tai Hing Cotton Mill ……, a banker may in a case such as the present be sued in tort as well as in contract; see Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm)[71]. But the duties in contract and tort are coextensive, and in the context of the present case nothing turns on the question whether the case is approached as one in contract or tort.”

In the case relied on by his Lordship, Midland Bank Trust, the duty in question was that of solicitors. Moreover, subsequent developments show that his Lordship took too restricted a view of the remarks in Tai Hing Cotton Mill[72] . On the question now under consideration, Quincecare is, in my respectful opinion, not good law.

[69][1992] 4 All E.R. 363.

[70]At 376.

[71][1979] Ch. 384.

[72]Compare his Lordship’s remarks at first instance in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd. [1990] 1 Q.B. 665 at 711.

I come now to consider whether either of the kinds of damages awarded for consequential loss, namely, net loss of business income and the face value of the ANI cheque, was, as the Bank argued, too remote. I commence with the contractual claims, which, it will be recalled, were for breach of the duty of reasonable care and skill in relation to paying the NAB cheques and also in relation to the telegraphic transfer. In the latter case the breach was really a failure to carry out the mandate or instruction given by the customer to the Bank for the telegraphic transmission of the funds represented by the TT cheque, to which the contract between banker and customer was basal. Hadley v. Baxendale and subsequent authorities show that the contemplation of the parties that falls for consideration is contemplation as at the date of the making of the contract. In this case, however, a particular difficulty arises because the contract establishing the relationship of banker and customer between the Bank and Nemur Varity was made in October 1986, whereas the breaches occurred in 1989 (and the losses compensated extend to 30 June 2002). Even if the span between the date of contracting and the breaches not be thought remarkable, the nature of the contract was such that, when made, it was, like other similar contracts, capable of lasting for many years, though it might have been varied or replaced by a formal written contract, at any rate if financial facilities were sought and granted. During the subsistence of such a contract many changes in the customer’s circumstances might occur. For instance, the nature of its business could change entirely. The contract was one to be performed from time to time and in the circumstances it seems appropriate to take into account the knowledge that the Bank acquired in the course of executing the contract. This can be done consistently with principle by treating the continuing or standing contract made in October 1986 as engaged and given content by instructions from time to time from the customer to the Bank and in particular by written orders to pay (that is, cheques) or to transmit funds telegraphically. The question, then, becomes whether at the times when the NAB cheques were presented and the application for telegraphic transfer was made the parties, or more particularly the Bank as the subsequent defaulting party, should reasonably, on the information then available, have contemplated that loss of the kind in question would probably occur (in the sense that it was not unlikely to occur) as a result of a breach of the contract and in particular of the contractual duty of care in relation to the payment of Nemur Varity’s cheques and the carrying out of its mandate for the telegraphic transfer.

During argument there was quite some discussion as to the genus of loss or head of damage which was in question, principally, it is true, in connection with reasonable foreseeability. Several possibilities were suggested such as the loss of opportunity of discovering the fraud, loss by fraud, difficulties between the broker and its customers or the loss of customers. In my opinion the loss or harm must be such as sounds in money, so that the first and third suggestions are inadmissible. Loss by fraud is far too wide. With the exception of the ANI cheque, I consider the relevant genus to be the loss of business income. Business interruption (espoused by Mr. Williams) and injury to the business might also be acceptable though they are wider[73]. In the case of the ANI cheque the genus is far less clear unless it is simply the loss of the face value of a cheque, for continuing to do business with ANI does not of itself sound in money. The only other possibility seems to be continuing to be duped by Charge.
[73]As to the effect of the level of classification, the discussions in Cambridge Credit Corporation at 366 per McHugh, J.A. and Chitty, op.cit., vol.i, 1292-1293, para.27-045 are very helpful.

Now, the parties and in particular the Bank knew at the time that Nemur Varity was an insurance broker and that it had an insurance broking account and may be taken to have known that its cheques often were and would often be for premiums payable to an insurer. At the same time it is to be remembered that the test being applied is not that of reasonable foreseeability, scil., ”as liable to happen even in the most unusual case, unless the risk is so small that a reasonable man would in the whole circumstances feel justified in neglecting it”.[74]
[74]Koufos at 385-386 per Lord Reid.

I shall consider loss of business income before loss of the face value of the ANI cheque. Taking first the breach in relation to the telegraphic transfer, which, it may be noted, was a single breach, it cannot, in my view, be said that the Bank should reasonably have contemplated that, should it mistake the proper account to which the funds were to be transferred, it was not unlikely that loss of the business of clients and thus of business income would result: that, in my respectful view, stretches reasonable contemplation too far. According to the common course of human affairs, if a premium is not received by an insurer (and, in the case of new insurance, acknowledged by the furnishing of a policy or otherwise) the broker makes inquiries or, in the case of a renewal, the insurer warns the broker or the insured; and the proponent or insured is protected. Although, I think, the Bank was to be taken to know the name of the account to which it was to hypothesise transferring the funds in non-compliance with the mandate, it was not to know that the account-holder was a fraudster or an entity associated with a fraudster. Nor do I consider that the fact that the Bank knew that it had by then collected three of the NAB cheques for the credit of that account requires any different conclusion.

As regards the breach of duty relating to the payment of the NAB cheques, the position is, I consider, less clear-cut. The breach found by the judge was the paying of the cheques, drawn on the insurance broking account, without proper inquiries having been made by the Bank at its North Balwyn branch where they were presented for deposit to the credit of an account of a customer other than the payee. Not only on liability but also on damages the appeal must proceed, as the trial had proceeded, on the basis that the two branches of the Bank were not to be treated as distinct as regards knowledge and conduct. However, the Bank did not know that the account into which, it was to assume, the cheques would through its default be paid was that of or associated with a fraudster. On the whole, I am not satisfied that the Bank should reasonably have contemplated that loss of the kind in question would probably (in the sense in which I have been using that word) result from a breach of its contractual duty of care in relation to the payment of cheques of Nemur Varity. That conclusion, I consider, is supported by the remarks of McHugh, J. in Kenny & Good set out earlier. To arrive at the contrary conclusion would, I think, be to impose liability upon the Bank exceeding that which it could be fairly regarded as having contemplated and been willing to accept, to adopt the words of Walsh, J. in Wenham v. Ella[75], applied by McHugh, J.A. in Alexander v. Cambridge Credit Corporation[76].
[75]At 466.
[76]At 368.

I come now to the loss of the face value of the ANI cheque. As will be recalled, that cheque, which was drawn by Nemur Varity in favour of ANI or bearer and was for additional premium, was regularly collected by the ANZ Bank for ANI. I am quite satisfied that it is not reasonably to be supposed that it was in the contemplation of the parties, and in particular of the Bank, that, in the event that the Bank breached its duty of care as paying bank by failing to make proper enquiries when the third party cheques were presented for payment or its duty of care in the execution of the telegraphic transfer by failing to credit the amount transferred to the correct account, Nemur Varity would probably suffer a loss of the kind claimed, namely, the face value of a subsequent cheque drawn by it and regularly collected for the credit of the named payee. A contrary conclusion could not be reached unless it could be reasonably supposed to have been within the contemplation of the parties at the relevant times[77] that, in the event of either such breach of the duty of care, Nemur Varity would continue to be duped by Charge or at any rate some fraudster. Such a supposition is not, in my view, reasonable.
[77]Specified in para [49].

I therefore conclude that in the case on contract each kind of consequential loss claimed is too remote to be recoverable as damages.

I turn finally to the claim in conversion. Its subject matter is limited to the four NAB cheques and does not include the TT cheque. The normal measure[78] of damages in conversion is the value of the goods converted: see, for instance, Caxton Publishing Co. Ltd. v. Sutherland Publishing Co.[79] and Furness v. Adrium Industries Pty. Ltd.[80]. In the case of a cheque, that is its face value: Morison v. London County and Westminster Bank Ltd.[81]. But the cases[82] and the text books[83] recognise that consequential loss may be recoverable. No case, however, was cited, nor has any come to my attention subsequently, in which damages of the kind in question here, and in particular loss of business income, were recovered as consequential loss upon the conversion of a cheque, though in Harrisons Group Holdings Ltd. v. Westpac Banking Corporation[84] King, C.J. awarded damages in the form of compound interest for consequential loss by way of loss of the use of the proceeds of a cheque which, if available, would have been put to productive use by reducing the plaintiffs’ indebtedness. Whether consequential loss is recoverable depends, as McGregor says,[85] on the principles of remoteness of damage. Those principles as they apply to conversion are, I think, not yet clear beyond all argument in Australia.
[78]Being the usual result of the application of the broad principle that damages in contract and tort (including conversion) are awarded by way of compensation: Butler v. Egg and Egg Pulp Marketing Board (1996) 114 C.L.R. 185 at 191.
[79][1939] A.C. 178 at 192.
[80][1996] 1 V.R. 668.
[81][1914] 3 K.B. 356 at 365 and 379.
[82]Such as Kuwait Airways at 1257 and Furness v. Adrium at 681.
[83]For example, McGregor on Damages,16th edn, 945, para.1436.
[84](1989) 51 S.A.S.R. 36 at 40-41.
[85]Loc. cit.

As has been seen earlier, it has undoubtedly been established since The Wagon Mound No.1 that the test for remoteness of damage in the tort of negligence is whether the damage suffered is of such a kind as the reasonable person should have foreseen. Since The Wagon Mound No.2 the same test for remoteness has been established for the tort of nuisance.[86] So dominant is negligence in the law of torts that it is easy to treat negligence and tort as co-extensive and unquestioningly to apply the same test of remoteness in the case of all other torts. That it is erroneous to do so is shown by Smith New Court Ltd. v. Scrimgeour Vickers[87] and the recent decision of the High Court in Palmer Bruyn & Parker[88]. Those cases show that for intentional torts, such as deceit and injurious falsehood, no requirement of reasonable foreseeability has to be satisfied. As they make clear, when it applies a requirement of reasonable foreseeability of damage of the kind that occurred serves to limit the defendant’s liability. Here, however, if that is the test of remoteness in conversion, it might be said in the light of France v. Gaudet[89] that it would serve to extend the defendant’s liability. For in the latter case, one of conversion, the Court of Queen’s Bench in a considered obiter dictum at the end of its judgment stated[90]:

“It is not necessary to determine whether notice is or is not necessary in trover, in order to enable a plaintiff to recover special damage which cannot form part of the actual present value of the things converted, as in the case of the withholding of the tools of a man’s trade, in which the damage arising from the deprivation of his property is not, and apparently cannot be fixed at the time of the conversion of the tools. In that case, however, we are inclined to think that either express notice must be given, or arise out of the circumstances of the case. This point was not determined in Bodley v Reynolds; but we think that there must have been evidence of knowledge on the part of the defendant that in the nature of things inconvenience beyond the loss of the tools must have been occasioned to the plaintiff.”

Although the reasoning in France v. Gaudet was disapproved by two members of the Court of Appeal in The Arpad[91] over the strong dissent of Scrutton, L.J.[92], and although the Court of Appeal in Kuwait Airways[93] accepted that it was bound by The Arpad, I do not think that the obiter dictum which I have set out was called in question, for the disapproval was concerned with the question of the value of the goods converted. Indeed, the reasoning of the majority in The Arpad may be said to be consistent with the dictum. It might therefore be said that express notice or knowledge that in the ordinary course loss beyond the face value of the cheque would be occasioned to Nemur Varity was necessary if the Bank was to be liable for consequential loss.

[86]This was accepted by the House of Lords in Cambridge Water Co. v. Eastern Counties LeatherPlc [1994] 2 A.C. 264, especially at 300-301. It was there stated that Lord Reid in The Wagon Mound No.2 appeared to regard the proposition in question as essentially one relating to remoteness.

[87][1997] A.C. 254.

[88](2001) 76 A.L.J.R. 163 at 166, 170 and 172-176, paras.13, 54 and 63-81.

[89](1871) L.R. 6 Q.B. 199.

[90]At 205 (citation omitted).

[91][1934] P 189.

[92]Which, in turn, McGregor, op.cit, at 133-135 and 947-948, paras.213-214 and 1438, considers may be preferred should the question come before the House of Lords, though the Third Supplement to that work notes at paras.214 and 1438A that the Court of Appeal has recently followed The Arpad in Saleslease Ltd. v. Davis [1999] 1 W.L.R. 1664 and Kuwait Airways.

[93]At 1260, para.531.

Further, conversion is a tort of strict liability[94] and, as such, is to be found at the lower or less culpable end of what Lord Steyn in Smith New Court[95] called “the sliding scale from strict liability to intentional wrongdoing”. Negligence of course is to be found midway along the sliding scale, for it requires fault in the sense of the failure to measure up to the standard of reasonable care. His Lordship (in whose judgment on the measure of damages three other members of the House of Lords agreed) was of the view that there was a justification for differentiating between the extent of liability for civil wrongs depending where in that sliding scale the particular civil wrong fitted it. It might, therefore, be said that a more stringent test of remoteness, satisfied only by express notice or special knowledge, is required for conversion than for negligence.
[94]Liability is strict in the sense that a person may commit a conversion without any fault on his or her part. In Caxton Publishing Lord Porter said at 202 that conversion “consists in an act intentionally done inconsistent with the owner’s right, though the doer may not know of or intend to challenge the property or possession of the true owner”. In Marfani & Co. Ltd. v. Midland Bank Ltd. [1968] 1 W.L.R. 956 at 970-971 Diplock, L.J. (as his Lordship then was) said that the liability was strict in that “the moral concept of fault in the sense of either knowledge by the doer of an act that it is likely to cause injury, loss or damage to another, or lack of reasonable care to avoid causing injury, loss or damage to another, plays no part. ... The duty is absolute; he acts at his peril.” Of course a converter may not be without fault: he or she may be a thief, for example.
[95]At 279.

On the other hand, France v. Gaudet, and indeed The Arpad, were decided before reasonable foreseeability was established as the test for remoteness in the tort of negligence. Moreover, in Cambridge Water Co. the House of Lords held that foreseeability of damage was “a prerequisite of recovery of damages“ or “of liability in damages”[96] under the principle of Rylands v. Fletcher[97]. That principle was described as one of strict liability “in the sense that the defendant may be held liable notwithstanding that he has exercised all due care to prevent the escape”.[98] The conclusion was based on references in Blackburn, J.’s judgment in Fletcher v. Rylands which held, to import that knowledge, or at least foreseeability of the risk, was a prerequisite to recovery and on the view that the principle was an extension of nuisance, it was logical to apply the same remoteness rule to it as to nuisance.[99] Their Lordships’ conclusion is described in Clerk & Lindsell on Torts[100] as “at first sight appear[ing] paradoxical” and in its limitation of the occupier’s liability it was similarly criticised by McHugh, J. in his dissenting judgment in Burnie Port Authority v. General Jones Pty. Ltd.[101] as being inconsistent with the rationale of the principle as a tort of strict liability. To my mind the validity of the criticism depends upon understanding “strict liability” as connoting a reference to the extent of damage for which a defendant is liable as against connoting a reference to the level of care taken by the defendant. But it is in the latter sense that the expression not only was used in Cambridge Water Co. but is, I think, used generally in the law of torts, as shown, for instance, in Fleming, The Law of Torts[102].
[96]Lord Goff’s language at 301 and 306 is not absolutely clear. Compare the alternative to “too remote” of “outside the scope of the duty” mentioned by Lord Hoffmann in Jolley at 1091 and considered in detail in Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co. Ltd. [1997] A.C. 191, especially at 212. Gerry Cross, “Does Only the Careless Polluter Pay? A Fresh Examination of the Nature of Private Nuisance”, (1995) 111 L.Q.R. 445 demonstrates that his Lordship’s conclusion relates to remoteness and that the assumption is that there has been an escape. So too does David Wilkinson, “Cambridge Water Co. v. Eastern Counties Leather Plc: Diluting Liability for Continuing Escapes” (1994) 57 Mod. L.R. 799 at 803-807. The similarity of Lord Goff’s language to that which he used at 302 when speaking of The Wagon Mound No.2 indeed makes it tolerably clear that remoteness is in question.
[97](1868) L.R. 3 HL 330; affirming Fletcher v. Rylands (1866) L.R. 1 Ex. 265.
[98]At 302. Clerk & Lindsell on Torts, 18th edn., 83, para.2-68 and First Supplement thereon, treats the decision as applying to strict liability torts generally, but Lord Goff’s reasoning does not warrant that view.
[99]At 306.
[100]Op.cit., 83, para.2-68.
[101](1994) 179 C.L.R. 520 at 591.
[102]9th edn., 367-371. The concept is usefully considered in the case note on Cambridge Water Co. by David Wilkinson already mentioned in footnote 96 especially at (57 Mod. L.R.) 803-806.

Again, in Harrisons Group Holdings[103] King, C.J. took reasonable foreseeability as the test of remoteness for conversion. It is perhaps significant that the defendant bank there had actual knowledge of the plaintiffs’ indebtedness arising out of the bills accepted by the bank for an acceptance fee and of the rates of interest being paid to finance the plaintiffs’ business. His Honour held that the calculation of the plaintiffs’ loss must be based upon those actual rates of interest, together with the acceptance fee, rather than merely on the prevailing rates of interest available to investors. Similarly, in Kuwait Airways the primary judge (Aikens, J.) had concluded that all three members of the Court of Appeal in Saleslease Ltd. v. Davis[104],a conversion case, were considering the question of remoteness by using a foreseeability test and, since counsel conceded that the Court of Appeal in Kuwait Airways was bound by The Arpad and Saleslease, that court accepted[105] that that was the test. Their Lordships a little later said[106]:

“It appears to us that, as the law now stands, in conversion cases a court has to ask whether at the time of the conversion the type of loss that occurred (as opposed to the precise manner in which it occurred) was reasonably foreseeable.”

[103]At 41.

[104][1999] 1 W.L.R. 1664.

[105]At 1260, para.531.

[106]At 1261, para.538.

In oral argument counsel for Nemur Varity appeared to me to assert or accept that reasonable foreseeability was the test for remoteness, submitting that it was satisfied, though he did go on to contend that, if knowledge was required, the Bank had the necessary knowledge. But in their subsequent written submissions on the Kuwait Airways case counsel for Nemur Varity, although arguing that the reasonable foreseeability test was satisfied, put as their primary submission that the court was not bound to apply such a test and that it was open to the court, consistently with the approach of Lord Hoffmann in Environment Agency (formerly National Rivers Authority) v. Empress Car Co. (Abertillery) Ltd.[107] - although it in fact is concerned with causation - to permit recovery of all damage which flows naturally and directly from the conversion. It was the principal thrust of the oral argument for the Bank that, if damages for consequential loss were to be recovered, the dictum in France v. Gaudet applied and knowledge was required. Counsel submitted that the plaintiff had to show that the Bank knew that the conversions would lead to loss of customers in the way his Honour had indicated and he contended that the Bank was not to know that the chain of events that followed would occur. It is true that he did from time to time argue in the context of conversion by reference to reasonable foreseeability, but this was only in the alternative or as a consequence of questions from the Bench. In their written submissions counsel for the Bank stressed the need for knowledge on the part of the defendant that in the nature of things inconvenience beyond the loss of the goods must have been occasioned to a plaintiff suing in conversion, though they did go on to deny that the type of loss or damage in question here could reasonably have been foreseen.
[107][1999] 2 A.C. 22 at 29-35, referred to in Kuwait Airways at 1257, paras.523 and 524.

After much reflection, I am not satisfied that the test for remoteness of damage in conversion is whether the loss claimed is of such a kind as was reasonably foreseeable. I say that for the following reasons. It is clear on the authorities that a remoteness test of reasonable foreseeability does not apply to all torts. So far as conversion is concerned, none of the cases on conversion discussed above is binding on this Court and there is on analysis little authority directly supporting that test. Kuwait Airways is not an authority, since the Court of Appeal proceeded on a concession by counsel. The analysis by Aikens, J. at first instance in that case of the judgments in Saleslease, on which counsel’s concession appears to have been based, is, in my respectful opinion, incorrect. For the only judgment which to my mind could be interpreted as applying reasonable foreseeability was that of Waller, L.J., who considered[108] whether the defendant could have anticipated[109], or could reasonably have anticipated, the consequential loss in the light of the knowledge of and notice to the defendant. But his Lordship’s remarks could, I think, as readily be treated as adopting a Hadley v. Baxendale test. Butler-Sloss, L.J. at any rate did not use reasonable foreseeability but rather spoke[110] in terms consistent with the dictum in France v. Gaudet, for she said that a consequential loss which was special to the circumstances of the particular plaintiff and which was not known to the tortfeasor was too remote. Although Schiemann, L.J. dissented on the facts in relation to remoteness, it can at least be said that he did not adopt reasonable foreseeability, for he considered[111] that the defendant was apprised of the particular use of the property which the plaintiffs would be deprived if he persisted in wrongfully refusing to release the goods and moreover was apprised of the income which they would obtain from that use. One is left, then, so far as I can see, with only the fact that King, C.J. applied reasonable foreseeability in Harrisons Group Holdings; but, despite the great respect to which any judgment of his Honour is entitled, the point as to the test for remoteness did not command a reasoned expression of view by his Honour. Moreover, the defendant had actual knowledge, so that, whatever the test, it was satisfied. The concession by counsel for the plaintiff in Kuwait Airways, on which the Court of Appeal acted, was based according to their Lordships not only on Saleslease but also upon The Arpad. I have to say, with respect, that I can find nothing in the majority judgments in that case which indicates that the test in conversion is one of reasonable foreseeability. Rather, their Lordships treated the rule in contract as applying, Greer, L.J. in particular saying[112] that only “the first rule” in Hadley v. Baxendale fell for consideration. Otherwise notice to the defendant of the particular facts was required. It might be said that Cambridge Water Co. supports the view that reasonable foreseeability is the test for conversion, since conversion, like the principle in Rylands v. Fletcher, is a tort of strict liability; but, as I have already indicated, reference to Lord Goff’s reasoning shows that the decision in that case is confined to the principle in Rylands v. Fletcher and (as a necessary step in the reasoning concerning that principle) nuisance.
[108]At 1670 and 1671 respectively.
[109]McGregor, op.cit., 947, para.1438, uses a similar formulation in stating that loss of profits has been allowed only where it could have been anticipated by the defendant. The paragraph was relied on by the Bank for the statement that the plaintiff’s loss of profits on contracts made with third parties has tended to form too remote an item of damage.
[110]At 1677.
[111]At 1676.
[112]At 216.

Nemur Varity, as I understand it, relies on the fact that conversion is a tort of strict liability in its submission, in effect, that this Court should hold that no remoteness test is applicable and that all losses flowing naturally and directly from the acts of conversion are recoverable. That view would appear to be supported by the observation of McHugh, J. in Burnie Port Authority about Cambridge Water Co. referred to earlier. But that observation depends upon the concept of strict liability having the connotation that the tortfeasor is liable for all damage caused, which, as I have already indicated[113], is not the appropriate connotation. Rather, as it seems to me, conversion may be committed entirely innocently and it is in that sense that liability for it is strict. In virtue of that it is located at the lower or less culpable end of “the sliding scale from strict liability to intentional wrongdoing” spoken of by Lord Steyn in Smith New Court, as indeed the description of the scale shows.[114] It is true that conversion may, for instance in the case of theft, take the form of intentional wrongdoing and thus be morally culpable. However, that is no part of the definition of the tort.[115] Moreover, the Privy Council in The Wagon Mound No.2[116] declined to discriminate between different cases of the tort there under consideration (nuisance) in determining the test for remoteness. It is implicit in what I have said in this paragraph that I regard the concept of this sliding scale as a useful mechanism to assist in determining the appropriate test for remoteness in a particular tort, given that in tort there are more tests than one.
[113]At para [59] above.
[114]Rylands v. Fletcher established a tort of strict liability. If the conclusion in Cambridge Water Co. is to be justified by reference to the scale, it may be noted that Lord Goff identified aspects of knowledge or foreseeability in the principle and it may also be said that a person who brings on to land something likely to do mischief if it escapes assumes a risk of damage, albeit that having the thing on the land is perfectly lawful.
[115]The act of conversion must, of course, be committed intentionally, but that is a different point.
[116]At 640. The passage was cited by Lord Goff in Cambridge Water Co. at 301, though at 300 his Lordship put aside certain kinds of private nuisances before entering upon a consideration of the question of the test for remoteness.

Thus, some more stringent test of remoteness than reasonable foreseeability is required for the strict liability tort of conversion. The obvious candidate seems to me that stated in France v. Gaudet, namely, express notice or special knowledge.

I now turn to apply that test. Counsel for Nemur Varity indicated in argument that, in the event that that test was held applicable, he relied on the matters enumerated in the answer he had earlier given to a question from the Bench as to why it was reasonably foreseeable that Nemur Varity would lose customers or would continue dealing with the fraudster (and draw the ANI cheque). Counsel had relied on four special features about the NAB cheques which were known to the Bank and which, in his submission, constituted “special knowledge” on its part sufficient to justify the consequential damages awarded. First – and perhaps this was only implicit in his submissions but it was fundamental – the drawer of the cheques was an insurance broker. Secondly, they were made payable to an insurance company or, it may be, a reinsurance company. Thirdly, they were drawn on “Insurance Broking Account”, a special purpose account, marketed indeed by the Bank and existing for the purpose of the broker’s holding sums for premiums to be forwarded to an insurer (and sums received from an insurer on account of insured or intended insured). In that regard counsel cited ss.26(3) and 27(1) of the Insurance (Agents and Brokers) Act 1984 (Cth) (“the Brokers Act”) as in force at the relevant time[117]. Fourthly, the cheques were presented for collection by a third party, that is, a person other than the named payee. In that regard counsel referred to the part of the Bank’s manual that instructed staff that, when that occurred, inquiry of the person presenting the cheque for collection was called for in order that the Bank might be satisfied that the person was entitled to do so.[118] In the light of all that knowledge, counsel argued, the Bank should have known that the cheques represented, or were very likely to represent, premiums for insurance for the benefit of clients of the broker, so that the Bank would think to itself, as indeed, he said, his Honour thought, that, if it allowed the cheques to be banked, the premiums might never reach the insurer but be wrongly misappropriated by the depositor, with the result that clients would fail to have the benefit of insurance and there would be difficulties between the broker and its clients.
[117]Additionally, s26(2) required the account to be called an “Insurance Broking Account”.
[118]Compare London Bank of Australia Ltd. v. Kendall (1920) 28 C.L.R. 401 at 417–418.

In response, Mr. Karkar in his reply for the Bank accepted that the facts relied on were correct except that the cheques were payable to a reinsurer or bearer. He went on , however, to refer to other facts known to the Bank. First, the cheques were presented for payment to the credit of an account of a company named “International Insurance Exchange Pty. Ltd.”, which suggested that it was an insurance intermediary, and were collected for the credit of that account. Secondly, that account was itself designated a “Premium Trust Account”, as shown by Exhibit P15, to which he took us. Thirdly, the presentation of third party cheques for collection is scarcely uncommon.[119] Mr. Karkar emphasised not only that fact but also that the cheques were bearer cheques and that a trust account is often used for the very purpose of the collection of third party cheques, as the person presenting such a cheque for payment, such as a solicitor or estate agent, is not the beneficial owner and merely holds the proceeds for another.[120] Accordingly, there was nothing suspicious and the Bank was entitled both to assume that the cheques came into its customer’s hands in a perfectly normal course and not to make inquiries[121]. It was implicit in this, though not, I think, expressly stated, that it could not be said that, in the ordinary course, premium payments from a customer might not be received by one broker or intermediary and paid to another broker or intermediary while in transit to the insurer, particularly if that insurer was supposed to be overseas. It was fundamental to Nemur Varity’s argument on remoteness, said Mr. Karkar, that the Bank should suspect that its customer was or might be a thief. Finally (though this was not the order in which he himself made the points), Mr. Karkar drew attention to the experiential truth concerning bankers to be found in statements by three eminent English judges to the effect that trust, not distrust, is the basis of a bank’s dealings with its customers.
[119]Compare National Commercial Banking Corporation of Australia Ltd. v. Batty (1986) 160 C.L.R. 251 at 294. Since the cheques in question were payable to bearer indorsement by the payee was not required for their negotiation: Cheques Act 1986 (Cth), s40(3).In Day v Bank of New South Wales (1978) 18 S.A.S.R. 163 the Full Court of South Australia reached different conclusions as to “negligence” in relation to an order cheque and a bearer cheque.
[120]Penmount Estates Ltd. v. National Provincial Bank Ltd. (1945) 173 L.T. 344 at 346 (a decision of MacKinnon, L.J. sitting at first instance) and Day v. Bank of New South Wales at 169 per Bray, C.J.
[121]Compare, on liability, Sansom v. Westpac Banking Corporation (1996) Aust. Torts Reports paras.81-383 at 63, 329.

Thus, in Barclays Bank plc v. Quincecare Ltd.[122] Steyn, J. after having stated that in considering whether a banker was put on notice by its customer’s conduct everything depended upon the particular facts of each case, including the standing of the corporate customer, the bank’s knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features and the scope and means for making reasonable inquiries, said[123]:
[122][1992] 4 All E.R. 363.
[123]At 377.

“But there is one particular factor which will often be decisive. That is the consideration that, in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief. In Sanders Bros v Maclean & Co[124] Bowen, L.J. observed:
[124](1883) 11 Q.B.D. 327 at 343.
'But the practice of merchants, it is never superfluous to remark, is not based on the supposition of possible frauds. The object of mercantile usages is to prevent the risk of insolvency, not of fraud; and any one who attempts to follow and understand the law merchant will soon find himself lost if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary is the case. Credit, not distrust, is the basis of commercial dealings; mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of fraud than it is on the supposition of forgery.'

That was, of course, a very different case, and the relationship between merchants is very different from the relationship between a banker and a customer. But, it is right to say that trust, not distrust, is also the basis of a bank's dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company."

The statements by Bowen, L.J. and Steyn, J. were in turn referred to by Millett, J. (as his Lordship then was) in Macmillan Inc v. Bishopsgate Investment Trust plc (No.3)[125] after his Lordship had said[126]:
“Account officers are not detectives. Unless and until they are alerted to the possibility of wrongdoing, they proceed, and are entitled to proceed, on the assumption that they are dealing with honest men. In order to establish constructive notice it is necessary to prove that the facts known to the defendant made it imperative for him to seek an explanation, because in the absence of an explanation it was obvious that the transaction was probably improper.”

[125][1995] 1 W.L.R. 978 at 1014–1015.

[126]At 1014.

The Bank faces the difficulty that, with the exception of the reinsurance point and, to some extent, what I have called the experiential truth, all the points it makes bear on liability, not remoteness, and by hypothesis liability in conversion has already been established. (I repeat that, when the Court ruled against allowing him to advance the two lines of argument on liability with which he opened the appeal, Mr. Karkar, although subsequently straying from time to time into matters of liability, immediately made it clear that the appeal was confined to damages.) With regard to the fact that the name of the payee of the NAB cheques included the word “Reinsurance”, rather than “Insurance”, it is true that by s7(a) of the Brokers Act that Act does not apply to reinsurance, although Mr. Karkar did not specifically rely on this provision. However, against that one has the fact that the cheques were drawn on an Insurance Broking Account and the provisions of s26(3) and 27(1) of the Act.

Nevertheless, whatever might be the position if reasonable foreseeability were the test, the matters relied on, taken together, are, in my judgment, quite insufficient to constitute special knowledge or express notice sufficient to permit of the recovery of the consequential damages awarded. There must be knowledge on the part of a defendant that in the nature of things inconvenience beyond the loss of the goods must have been occasioned to the plaintiff. The matters relied on did not show directly that loss of business income would occur nor did they show that indirectly, by showing that the chain of events which his Honour found occurred and resulted in loss of business income would occur. As I said when considering the claims in contract, in the common course of human affairs, if a cheque for a premium goes astray, the insured or proponent is not left unprotected. That may not, of course, be so if a fraudster is responsible for the cheque going astray. But what was missing from Nemur Varity’s proofs here, as it seems to me, was special knowledge on the part of the Bank or express notice to it that IIE or ANI was or their respective servants or agents were fraudulent. It is not enough for this test of remoteness that the Bank, on reflection, might think that if certain events happened customers of Nemur Varity might be uninsured and, if so, might withdraw their custom from it. What is required is knowledge or express notice of facts, not of a series of possibilities. As regards the ANI cheque, the position is even stronger. The Bank had no knowledge or express notice that Nemur Varity would continue to deal with ANI and be duped by it or its associates. Even if the test for remoteness were the much more liberal one of reasonable foreseeability the loss of the face value of the cheque was not reasonably foreseeable in the event that the Bank converted the NAB cheques by collecting them for IIE, especially since the ANI cheque was not diverted.

During the course of argument Mr. Williams for Nemur Varity objected that the notice of appeal did not in a relevant way specifically challenge the judge’s conclusion in respect of the ANI cheque. I agree. In reply, however, Mr. Karkar applied to amend para.13 of the notice to add a reference to the ANI cheque as part of the consequential loss which was challenged by the Bank. The point had been the subject of the Bank’s written outline of argument and in his rejoinder by leave Mr. Williams very fairly disavowed any prejudice. Accordingly, I would grant the amendment sought.

To sum up on remoteness: in my judgment, all the damages awarded for consequential loss, whether for breach of duty of care or in conversion, are too remote.

Undertaking

On this appeal the Bank challenged the right of Nemur Varity to recover the damages or interest awarded otherwise than as a trustee for those whose insurance premiums had been misapplied. The argument put by counsel was that, although Nemur Varity had the right to sue for them in its capacity as trustee, damages and interest should not have been awarded otherwise than on the basis, at least, of an undertaking by Nemur Varity to see to the proper application of the damages and interest recovered[127]. The short answer is that no such argument was put below and no such undertaking was sought then. The point was not even the subject of a ground of appeal. I think it too late to raise such an argument at the hearing of this appeal, especially as evidence could have been led as to any funding arrangements for this action made between Nemur Varity and the clients concerned[128]. Below, counsel for the respondent in argument[129] and his Honour in para.158 of his principal judgment and at p.3 of his judgment on interest recognised that Nemur Varity might be under some obligation to its clients in relation to any sum recovered, but that is quite insufficient for the Bank’s present argument. I therefore do not accede to it.
[127]In accordance with the observation of Mason, C.J. in Commissioner of State Revenue (Vict) v. Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51 at 78.
[128]The principle is stated in, for example, Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418 at 438. Compare Ravinder Rohini Pty. Ltd. v. Krizaic (1991) 30 F.C.R. 300 at 314-316 and the High Court decisions there cited.
[129]Transcript p.1131.

Conclusion

For these reasons I would allow this appeal, set aside the judgment given on 21 September 1999 and substitute judgment for damages in an amount equal to the face value of the NAB cheques and the TT cheque together with interest in an appropriate sum. I would hear counsel on the form of the orders to be made, including on the question of costs below.

In the result it is unnecessary to rule on another objection taken by Mr. Williams to a part of Mr. Karkar’s argument. In expressing it in that way I do not mean to criticise Mr. Williams, for in many respects the case which the Bank sought to put on appeal was quite different from the case presented below, something which put respondent’s counsel, not to mention this court and the primary judge, in a difficult position. The objection now in question was to a root and branch argument put briefly on appeal. Without expressing any comment on its strength or weakness I simply record that the argument was that by reason of certain provisions of the Brokers Act, whatever else followed from the misappropriation of the premiums, it could not be said that there was no insurance.

---

[2002] VSCA 18

1 March 2002