Waterlow & Sons Ltd v Banco de Portugal

Die Jovis, 28° Aprilis, 1932.

Parliamentary Archives,
HL/PO/JU/4/3/866

Lord
Chancellor.

Lord
Warring-
ton of
Clyffe.

Lord
Atkin.

Lord

Russell of
Killowen.

Lord
Macmillan.

BANCO DE PORTUGAL

v.
WATERLOW & SONS, LTD.

WATERLOW & SONS, LTD.

v•
BANCO DE PORTUGAL

(Consolidated Appeals).

The Lord Chancellor.

These are the Appeals of the Banco de Portugal, hereinafter
called " the Bank," and of Waterlow & Sons, Limited, hereinafter
called " Messrs. Waterlow ", from an Order of the Court of Appeal
dated the 26th day of March, 1931, varying the Judgment and
Order of the Honourable Mr. Justice Wright, dated the 12th day
of January, 1931. The Learned Judge directed judgment to be
entered for the Bank for £569,421 with costs. The Court of
Appeal, by a majority consisting of Lord Justice Greer and Lord
Justice Slesser, directed that judgment should be entered for the
Bank for the reduced sum of £300,000, Lord Justice Scrutton
dissenting from that Judgment, for in his view the Bank of
Portugal was only entitled to the sum of £8,922, which was covered
by a payment by the Defendants into Court of £10,000.

The Bank is the Central Bank of Portugal and is incorporated
by Special Charter under the Laws of Portugal. Since 1887 it has
held from the Government of Portugal an exclusive license for the
issue of bank notes as legal tender in Portugal and the adjacent
Portuguese Islands, but this license does not extend to the issue of
bank notes for the Portuguese Colonies. At all dates material to
this case the currency of Portugal was composed solely of notes
issued by the Bank. The Bank act as Bankers to the Portuguese
Government and carry on a general banking business, having a
head office in Lisbon, a branch office in Oporto, and agencies and
correspondents in various towns and places throughout Portugal
and the Islands.

The Governor of the Bank is appointed by the Portuguese
Government and presides at Directors' meetings. The Directors
at all material times selected the names of three of their number,
out of which the Government in its turn selected one to act as Vice-
Governor. The Directors are appointed by the General Meeting
of the Shareholders. The Government also at all material times
appointed a Secretary-General whose duties were defined by
Article 66 of the Statutes of 1892. This Article prescribed (inter
alia) that he shall " satisfy himself of the strict observation of the
" Bank's Statutes and regulations ... in order to be able to
" appreciate the situation of the Bank as regards the safeguard of
" the Public interest and of the fiduciary circulation." He did
not vote at Directors' meetings.

Messrs. Waterlow are a well-known firm of printers having
their registered office at 26, Great Winchester Street in the City of
London. A considerable proportion of their business consists of
bank note and security printing. Under a contract dated the 27th
November, 1922, and a repeat order under that contract dated the

2 [2]

20th February, 1924, the Bank employed them to print and supply
certain bank notes required by the Bank for issue in Portugal.
Under this contract and repeat order Messrs. Waterlow supplied
to the Bank 600,000 notes of a face value of 500 Escudos. The
said notes contained on their face a portrait of Vasco da Gama
and are referred to as 500 Escudos notes of the Vasco da Gama
type. These notes were delivered to the Bank in 1923 and 1924
and all or nearly all of them were put into circulation. The value
of the Escudo at dates material to this case was approximately
Two Pence Halfpenny, so that a 500 Escudo note was worth
approximately £5.

The notes of the Bank are at present inconvertible; that is to
say, the Bank is under no obligation to replace them when pre-
sented by anything else than its own notes. The Learned Judge
found, and the Court of Appeal agreed with him, that the prospect
of the notes ever becoming convertible with gold was so remote that
it might be disregarded. With that finding I agree. The amount
of notes which could be issued was controlled by law. Within these
limits it was subject to the policy of the Bank. The right was
accompanied by conditions as to the maintenance of reserves and
prohibitions as to certain classes of business.

For example:—By Article 28 of the Law of the 29th of July,

1887.

The Bank is expressly forbidden from carrying out the follow-
ing operations:—

(a) To purchase for its own account any shares in the
Bank.

(b) To rediscount its own bills.

3. To carry out any Stock Exchange operations which
   cannot be immediately liquidated even if for account of third
   parties.

4. To pay interest on any cash received in account
   current payable at sight.

5. To promote or take part in the creation of commercial
   banking or other undertakings.

(f) To undertake any risky negotiations or insurance.

(g) To buy and sell, for its own account, any commercial
goods.

(h) To possess real estate and rights apart from the City
premises necessary for the carrying out of its functions, except
through the effect of any assignment or Public Sale, or in
order to secure the repayment of credits, but it will have to
proceed to the liquidation of such goods (or " estate ") within
the shortest period possible.

Again, there was an obligation upon them to issue notes on Govern-
ment service. Finally, it must be remembered that the Bank is a
Bank of Issue with control and management of the currency. Its
directors were only entitled to issue notes as far as in their reason-
able opinion it was right and proper for them to do so in their
capacity as guardians of the currency of the country.

In the course of 1925 Messrs. Waterlow, as if has been found
by the Courts below, and as they admitted on Appeal, were guilty
of a breach of an absolute duty to the Bank under the contracts
referred to because, without authority from or the knowledge of
the Bank, they printed and delivered to one Marang van Ysselvere
580,000 notes of 500 Escudos of the Vasco da Gama type.

Marang was one of a group of criminals, among whom was the
Portuguese Minister at the Hague. The criminals having

[3] 3

obtained the notes from the Messrs. Waterlow introduced them
into Portugal and proceeded to put a very large number of them
into circulation there.

These notes were printed either from the same plates as had
been used for the notes printed for the Bank or from plates made
from the same die. Each of the Bank's notes bore a serial letter
and number and the signatures of the Governor and one or other of
the Directors. 490,000 of the said 580,000 were exact duplicates
of notes printed for the Bank and were indistinguishable from the
genuine notes delivered to and issued by the Bank except by certain
tests unknown to the Bank and depending on data which were
exclusively in the possession of Messrs. Waterlow. These tests
involved various matters, such as the existence and the significance
of minute letters on the genuine and the unauthorised notes and
of minute differences between the genuine and the unauthorised
notes in the distance from one typographical element to another on
the face of the note. The notes were delivered to Marang as to
200,000 in February and March, 1925, and as to 380,000 from
August to November, 1925.

In order to facilitate the putting into circulation of very large
quantities of these notes the criminals formed a Bank known as the
Banco Angola e Metropole. Under Portuguese law in order to
constitute and operate a Bank it was necessary to obtain the
authority of the Minister of Finance, who was advised on such
matters by a body known as the Banking Council. The Minister
of Finance on the 27th June, 1925, authorised the formation of
the Banco Angola e Metropole on the condition, among others, that
the capital of that Bank, the minimum figure for which he had
previously fixed at 20,000,000 Escudos, should be fully subscribed.
This condition was accepted and as the criminals had already
received notes to an amount of 100,000,000 Escudos from Messrs.
Waterlow, they were able promptly to comply with it.

The Banco Angola e Metropole, having been formed, proceeded
to carry out transactions on a large scale, but their business fell
under suspicion and upon the 19th November, 1925, the Minister
of Finance instructed the Inspector of Banking Commerce to
investigate their activities. On Friday, the 4th December, 1925,
the Manager of a private Bank in Lisbon called upon Dr. Ulrich,
a Director of the Bank, and informed him of certain suspicious
dealings affecting the Banco Angola e Metropole at Oporto, and
Dr. Ulrich communicated with the Assistant Judge of Criminal
Investigation. On the evening of that day a number of officials
both of the State and the Bank went to Oporto. On the following
day the premises of the Banco Angola e Metropole were searched
by the police. Many packets of 500 Escudo notes of the Vasco da
Gama type were found, but apparently the notes, though new, were
not consecutive, nor were the series the same. Instructions were
given that all notes of this type in the Oporto branch of the Bank
should be arranged in series, and also that 2,000 of the notes found
on the premises of the Banco Angola e Metropole should lie similarly
arranged. Late on the night of the 5th. Saturday, or early on the
Sunday morning, the 6th. four notes, each in duplicate, making
eight in all, were discovered among those in the Bank's Branch
and this was conclusive proof of forgery.

The Bank's officials returned immediately to Lisbon, and on the
Sunday evening a meeting of the Bank's Directors was held. The
position was certainly alarming. It was obvious that there were
forged notes in existence, but how, when, where and to what extent
the forgeries had taken place was entirely unknown. After pro-
longed consideration, the Bank resolved to withdraw from circula-
tion the notes of 500 Escudos, 2nd Plate, gold, on which appeared

4 [4]

the effigy of Vasco da Gama. The notice was given in the following
terms, and was published in the '' Diario de Noticias " and in
the " Seculo " of the 7th December, 1925, and other papers:

" The Administration of the Bank of Portugal has
" resolved to withdraw from circulation the notes of 500
" Escudos, 2nd plate, gold, on which appears the effigy of
" Vasco da Gama.

" In view of this resolution, the notes of this type and plate
" now in circulation are to be exchanged for others of the same
" or some other denomination at the Head Office of the Bank
" in Lisbon, at the Branch Office in Oporto and at the Offices
" of its Agencies on the Continent and in Funchal.

" Lisbon, 7th December, 1925.

" For the Bank of Portugal.
" THE DIRECTORS:

" J. motta gomes, Junior,

" manuel casal ribeiro carvalho."

The result was a run on the Bank, and in the course of the next
few days many thousands of notes both good and bad of the Vasco
da Gama type were brought by their holders to the Bank or one of
its branches, and for each note so brought into the Bank, the Bank
handed to the holder a good note for 500 escudos.

On the 7th December the Bank telegraphed to Messrs. Waterlow
as follows:—

(Despatched at 2.25 p.m. Reed. 5.14 p.m.)

" Imprimerie,

" London. 7th December, 1925.

" Great falsification notes of five hundred Escudos send
" expert Lisbon urgently to examine. Make investigations on
" your side.

" Bank of Portugal,

" camacho rodrigues."

Messrs. Waterlow replied in the following terms:—

" Camacho Rodriguez,
" Bank of Portugal,

" Lisbon. 8th December, 1925.

" Your cable 7th received. Arranging for expert to leave
" London immediately. Will wire you actual time and
" departure. Write fully and send specimens.

" waterlow & sons, ltd."
(Despatched 12.25 p.m. Received 1.56 p.m.)

Sir William Waterlow, accompanied by two other of his
directors, had interviews with Colonel Lucas in London, who was
acting on behalf of the Bank, and eventually left for Lisbon, where
he arrived upon the 13th December. Meantime the Bank had been
exchanging the notes in the way above mentioned.

It ought here to be said that no suggestion has been made, or
can be made, against the honesty of Messrs. Waterlow. They were,
just as much as the Bank was, victims of Marang's fraud, but when
Sir William Waterlow arrived in Lisbon he was an object of
suspicion (as indeed the Directors of the Bank themselves had been)
and was for a time kept at arm's length.

[5] 5

In the result, the Bank finally found itself in possession of
799,190 Vasco da Gama notes, and of these it was subsequently
ascertained that 209,718 were notes printed without authority by
Messrs. Waterlow for Marang, and which are hereinafter referred
to as " the, Forged notes."

On December 1st, 1925, the note circulation of the Bank con-
sisted of two classes: (1) notes issued as loans to the Government
which the Government would put into circulation, and (2) notes
issued by the Bank for its ordinary commercial needs, against a
certain specified reserve of gold much less than the face value of
the notes.

The total note circulation in Portugal was about 1,700,000,000
Escudos (seventeen million pounds). Messrs. Waterlow had printed
and delivered to Marang notes to the value of 290 million Escudos,
or about one-sixth of the total note issue. Of these, notes to a
value of over 100 million Escudos (one million pounds) had been
put into circulation. They had been put in circulation from time
to time from some date in the first half of 1925. They must have
passed from hand to hand. Many of them must have been paid
into the Bank's head office or some branch office of the Bank, and
been re-issued. On such notes the Bank would certainly be liable,
and it had no means of knowing whether any note had, or had not,
been re-issued

Notes to the value of 195,630,000 Escudos had been authorised
against a 15 per cent, minimum gold reserved for the Bank's com-
mercial business as bankers. Of this amount the Bank had prior
to the 7th December, 1925, issued about 65 million Escudos. The
unissued balance of about 131 million Escudos constituted reserves
on which the Bank could draw as and when they required to do so.
It may here be stated that as a result of Messrs. Waterlow's breach
of contract, the note issue was increased by approximately
104,859,000 Escudos, and the unissued balance was thus consider-
ably reduced.

Within a short space of time, i.e. by July, 19th, 1926,
the Bank obtained a considerable increase in its power to issue
notes. The Government by the Prime Minister had approved of
the original action of the Bank on December 6th, 1925, and the
delay in regulating the position, as appears from the preamble to
the Decree of July 19th, 1926. resulted from a change of Govern-
ment, which interrupted negotiations. That Decree authorised
(1) an issue of a hundred million Escudos to be repaid out of the
anticipated indemnities from Waterlows. It is not suggested that
this loan from a third party can be used to reduce damages due
from Waterlows: (2) a further issue of a hundred million Escudos
to be used for commercial operations; (3) a further issue of
125 million Escudos, to be used in colonial development, which
does not affect this case.

The Plaintiffs, the Bank, issued a writ upon the 5th day of
April, 1928, claiming damages for breach of contract and /or
negligence and/or conversion. In their Statement of Claim, the
Plaintiffs added a count under the Copyright Act, but this and the
claims for negligence and conversion were not pressed on appeal,
and they relied upon the Breach of Contract only. Such Breach
of Contract is set out in the 9th paragraph of their Statement of
Claim and is as follows :

" In breach of the express terms of the said contract
" and /or negligently and in breach of the implied terms as
" set out in paragraph 4 hereof and /or negligently and in
" breach of the duty set out in paragraph 5 hereof, the
" Defendants between January, 1925, and September. 1925.
" without the authority of the Plaintiffs printed from the said

6 [6]

" plates and /or from plates made from the said die or dies
" on paper made to the Plaintiff's specification and bearing
" the watermark " Banco de Portugal " and delivered in
" London to one Marang a Dutchman about 580,000 bank-
'' notes of the value of 500 Escudos each of the said Vasco da
" Gama design purporting to be banknotes of the Plaintiff
" Bank."

The particulars of damage originally amounted to the sum of
£1,115,613, but the Bank professed itself willing to give credit, for
the sum of £488,430, which they had received in the liquidation of
the Banco Angola e Metropole, and so the net claim was £610,392.

By their Amended Defence, Messrs. Waterlow denied that the
Contract of the 27th November, 1922, was subject to the implied
terms alleged; they denied that they were guilty of any breach of
the express or implied terms of the contract; they denied that the
Bank had suffered any loss and alleged in the alternative that, if
the Bank had suffered any loss, such loss was caused solely by the
Bank's own voluntary act in withdrawing from circulation the
Vasco da Gama 500 Escudo notes and exchanging them for other
notes although the Forged notes or some of them which were in
circulation were distinguishable from the authorised ones and
although the Bank were under no liability to pay the unauthorised
notes; and in the further alternative they alleged that any damage
was caused by or contributed to by the negligence of the Bank.

In this state of the pleadings, the matter came before the
Learned Judge. In effect he rejected the contentions of Messrs.
Waterlow, both as to the amount of damage and the measure of
damage. He, however, was of opinion that by December 16th, the
Bank knew (or ought to have known) the tests by which they could
distinguish some of the forged notes from the authorised notes,
and he held that from that date Messrs. Waterlow were not liable
for damages in respect of the good notes which they gave in
exchange for forged notes, and upon this basis gave judgment for
the amount above referred to, and not for the whole of the Bank's
claim.

When the matter came before the Court of Appeal, all the
Learned Lords Justice agreed that the Bank were justified in
calling in the Vasco da Gama type notes and exchanging good notes
both for the authorised and Forged notes, but Lord Justice Greer
and Lord Justice Slesser came to the conclusion that the Bank knew
(or ought to have known) how to distinguish between the authorised
and the Forged notes by December 10th, instead of by December
16th, as Mr. Justice Wright had held, and acting upon this finding
they reduced the damages to a round sum of £300,000 to cover all
items. Lord Justice Scrutton took a contrary view. He was of
opinion that the Bank were justified in exchanging all notes up to
as late a date as December 26th, but he also held that a different
measure of damages applied : namely, that the only loss which the
Bank had really suffered was the loss incurred in printing new notes
to give out in exchange for the Vasco da Gama issue.

In the result, judgment from the Court of Appeal was given for
£300,000, and from that the present appeal is brought.

The main questions in the Appeal are briefly :

(a) Whether the Bank, issuing an inconvertible currency,
i.e., having right to issue notes but no obligation to honour
them otherwise than by giving in exchange other notes, until
some future return to convertibility at a date so remote and
unlikely to occur that it could riot be taken practically into
account, suffered any other than a merely nominal loss (apart
from the cost of printing) when they called in bad notes put
into circulation by forgers and gave good notes in exchange for
them.

[7] 7

2. Whether in the circumstances of this Case the Bank,
   when they gave in exchange for a forged note of the face value
   of 500 Escudos a good note of that face value, could properly
   be said to have suffered a loss of 500 Escudos, with the result
   that Water Iowa, who are liable by reason of a breach of con-
   tract which enabled the forged notes to be put into circulation,
   are bound to pay to the Bank 500 Escudos converted into
   sterling at the rate current at the date of the loss.

3. Whether the Bank gave evidence of, or proved, any
   loss at all.

4. Whether if the Bank proved any loss, such loss was
   not caused in whole or in part by the voluntary action of the
   Bank themselves or was not in whole or in part such a loss as
   could not fairly and reasonably be considered as arising
   naturally from the breach of contract or such a loss as could
   not be reasonably supposed to have been in contemplation by
   both parties at the time of making the contract as the probable
   result of the breach, or whether the loss was not aggravated by
   the failure of the Bank to take reasonable steps to limit the
   loss.

Messrs. Waterlow, on appeal, did not dispute the proposition
that they were guilty of a breach of absolute duty under an implied
term of the contract.

It will be convenient to take first the question whether the Bank
were justified in exchanging new notes for the Vasco da Gama
notes (both authorised and forged) as and when they did. It will
be observed that upon this point we have concurrent findings in the
Courts below. Both Mr. Justice Wright and all the three members
of the Court of Appeal held that they were, the only difference of
opinion being up to what period they were so justified.

In coming to a proper determination of this question, it is
important to recollect the position of the Bank both before and
after the discovery of the forgeries. It will be recollected that
the Bank was in effect the National Bank of Portugal, the sole
issuing Bank in that country, and the Bank upon which the credit
and currency of the country depended. This appears from the
answers given by Dr. Ulrich in his examination in chief :

Q. 286.—Supposing that you had refused to pay any Vasco
da Gama notes, what would the effect have been on the public
as regards your issue of notes altogether, in your opinion?

I think the effect would be very extremely serious because
the people seeing that the Bank were refusing a note of a certain
type would easily have been inclined to think that next day
another can be refused in the same way. In these conditions
there would have been a general discredit for all the notes of
the Bank, that means for the total currency of the country. I
cannot really easily foresee the effects coming from such a
measure, but it is easy to understand that if anybody has
merchandise in his power of a certain and definite value he
would have refused to exchange his merchandise against a piece
of paper of a doubtful value or discussed value, so the country
would have been brought to a general stoppage for the
economical life of the country and naturally the people in
Portugal would have taken the most severe violences against the
Bank, and I am sure that a Revolution would have been brought
about by this fact.

Q. 287.—In your opinion, that would have been the
internal result in Portugal ?—Yes.

Q. 288.—What about the external result as regards
Foreign Exchanges I

8 [8]

I think the market for Portuguese currency abroad would
have been suppressed at once, no bank would have been willing
to sell Escudos when they knew the Escudos were paid in paper
of doubtful value and of discussed value, so the Foreign
Exchanges of the country probably also would have been
stopped.

Similar evidence was given on the Bank's behalf by other
witnesses called by them, and the Learned Trial Judge said :—

" The justification for acting with such promptitude
"which is put forward, and I think put forward with
" foundation, was that it was already known and could not be
" suppressed that there was this great falsification of notes
" going on, that the only way to avoid a financial crisis and
" an entire upheaval of the currency was to withdraw this
" issue, and that there was no opportunity of further delay
" because the consequences of delay would have been too
" serious to contemplate. ... At least 4,000 notes ready
" to be issued had been found in the Banco Angola e
" Metropole, and what the Plaintiffs did was simply done in
" order to maintain the credit of their currency and of their
" Bank, and was, so far as I can judge, and as I hold, done
" reasonably in all the circumstances. It was a necessary and
" indeed, in all the circumstances, an inevitable consequence
" of the falsification and circulation of these spurious notes."

Lord Justice Scrutton, commenting upon this, says:—

"The Judge below has found that by December 16th the

" Bank might have discovered a means of identifying some of

" the forged, notes. The Bank by Government Decree stopped

" paying all Vasco da Gama 500-Escudos notes after December

" 26th. Mr. Justice Wright has deducted from the damages

" £80,000, for notes paid after December 16th. As he finds

" that the Bank were justified in their action on December 7th

" in calling in the issue and paying all notes, he must have

" found that they would have been justified when they could

" distinguish the forged notes, which innocent holders could

" not do, in refusing to pay some forged notes, while paying

" others. Such an action in my opinion would destroy all

" confidence in the paper currency. It was the Bank's own

" printers who had from the Bank's own plates wrongly put

" this unauthorised currency on the market. It was indis-

" tinguishable to innocent holders from genuine currency, and

" I cannot think the Bank was bound to sacrifice innocent

" holders and the reputation of its national currency to protect

" the printers, the wrongdoers."

In England the law is that a person is not obliged to minimise
damages on behalf of another who has broken a contract if by doing
so he would have injured his commercial reputation by getting a
bad name in the trade. Finlay & Kwik Hoo Tong, 1929 1K.B. 400.
The evidence is that the Bank—remembering always that they
were the issuing Bank of the paper currency—had to protect
before anything else the confidence which such currency inspired
in the Portuguese public. ' What confidence," they asked,
" would all the other notes of the Bank of Portugal merit
" if the Bank did not adopt such a policy?' "It is one,"
they say, ' always adopted and similar to that adopted as
" a rule by banks of issue, even when they can allege the forgery
" is manifest and that the public has not taken the precautions
" necessary in receiving false notes." I have come to the con-
clusion that the Bank would have been failing in their duty to their
shareholders, their customers and their country if they had not
taken the step they did.

[9] 9

In my opinion these findings are correct, and the Bank had no
alternative on December 7th but to do what they in fact did. They
were in a position of extreme difficulty and extreme danger, caused,
as I think, by the unfortunate and unwitting breach of contract
on the part of Messrs. Waterlow.

As the Bank urge, for a country to find that what it believed
to be a substantial portion of its legal wealth was nothing more
than worthless pieces of paper instead of genuine notes of the Bank
would have created an economic panic and confusion which would
have caused the gravest damage to the credit of the Bank and
might even have shaken the whole economic and commercial life
of the country.

I now pass to a consideration of whether December 10th, as
Lord Justice Greer and Lord Justice Slesser held or December
16th, as Mr. Justice Wright held or December 26th as Lord Justice
Scrutton held, is the correct date for determining when the Bank's
knowledge was of such a character as disentitled them from
exchanging new notes for the Vasco da Gama notes, both
authorised and forged. I would add here that the Learned
Counsel at the Bar of Your Lordships' House, arguing on behalf
of Messrs. Waterlow, endeavoured to persuade the House that the
Bank ought not to have acted so precipitately in giving notice of
calling in, and that they must have known by December 9th how to
distinguish between the authorised and the forged notes, and so
that they ought not to have exchanged any more after that date.

This is, largely, a question of fact, but having come to the
conclusion that the Bank were entitled to issue their notice on
December 7th, I reject the argument for Messrs. Waterlow that
the Bank acted too precipitately, and the only question therefore
remaining is whether December 10th, December 16th or December
26th is the proper date to take as being that upon which the know-
ledge of the Bank was such as disentitled them from paying out
further good notes.

It appears to me that Lord Justice Scrutton was right for his
reasons above referred to in rejecting the contention that December
10th or December 16th was the date to be taken as the one upon
which the Bank, knew or were in a position to know, how to dis-
tinguish certain of the notes. The Bank in fact exchanged new
notes for forged notes as late as July, 1927. Logically I
can see no reason why they should not claim from Messrs.
Waterlow any damage properly flowing in respect of notes so
exchanged so late, and upon this showing even the date fixed by
Lord Justice Scrutton of December 26th would have to be recon-
sidered. I agree, however, that December 26th is the proper date
and for the following reason. By a notice issued by the Ministry
of Finance in Portugal it was ordered that the 22nd day of
December should be fixed as the last day for the exchange of notes.
This date was subsequently extended to the 26th December, and I
am content to leave it at that.

What then is the amount of damages to which the Bank are
entitled upon that date, subject to the question of the correct
measure of damages ?

Taking December 26th as the date, it remains to be considered
how the sum of £488,430 which the Bank recovered in the liquida-
tion of the Banco Angola e Metropole is to be dealt with. It was
contended by Messrs, Waterlow that this sum ought to be treated
as salvage in respect of the total loss suffered by the Bank in
respect of the unauthorised notes. It wais said that in the present
action the amount to be recovered was in respect of part only of
those notes, namely, 209,718 less 16,000 notes, and that any credit
to be given must be based on the same subject matter, namely,

10 [10]

salvage in respect of 209,718 less 16,000 notes, i.e. twelve-thirteenths
of £488,430, namely £450,860. In my view this is not the true
principle applicable. Legally, Messrs, Waterlow may not be
entitled to any credit in respect of this sum of £488,430, as the
amount was recoverable against different parties and on a different
cause of action. The Bank, however, do not desire to stand upon
their strict rights, and in my opinion, if the total amount to be
recovered from Messrs. Waterlow added to the sum of £488,430
exceeds the total loss actually incurred, Messrs. Waterlow should
have credit for such excess. The Bank's total loss was £1,092,281
plus £6,541. Against this, credit should be given for £488,430,
leaving a net loss of £610,392. This is the principle laid down by
the Court of Appeal in the case of the Morgengry and The Black-
cock, 1900 P. p. 1, and it is that principle which in my view should
be following in the present case.

I now pass to the question : What is the true measure of
damages ?

Two points are taken on behalf of Messrs. Waterlow. They
contend

1. The loss, if any, suffered by the Bank was caused in
   whole or in part by the voluntary action of the Bank and /or
   was in whole or in part a loss which could not fairly and
   reasonably be considered as arising naturally from Waterlow's
   breach of contract and was a loss which could not reasonably be
   supposed to have been in contemplation of both parties at the
   time of the making of the contract as the probable result of the
   breach.

2. The loss suffered by the Bank, if any, was merely
   nominal, being the present value of the liability at an undeter-
   mined and undeterminable future date, to give gold or other
   value for the good notes it issued in exchange for bad notes.

As to (1), the law is as follows : The leading case in English law
is that of Hadley v. Baxendale, 1854, 9 Exchequer, Page 341,
where it is laid down by Mr. Baron Alderson, giving the Judgment
of the Court:

" We think the proper rule in such a case as the present
" is this: Where two parties have made a contract which one
" of them has broken the damages which the other party ought
" to receive in respect of such breach of contract should be
" such as may fairly and reasonably be considered 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. Now if the special circumstances under
" which the contract was actually made were communicated
" by the plaintiffs to the defendant, and thus known to both
" parties, the damages resulting from the breach of such a
" contract which they would reasonably contemplate, would
" be the amount of injury which would ordinarily follow from
" a breach of contract under these special circumstances so
" known and communicated. But on the other hand, if these
" special circumstances were wholly unknown to the party
" breaking the contract, he at the most could only be supposed
" to have had in his contemplation the amount of injury which
" would arise generally, and in the great multitude of cases,
" not affected by any special circumstances from such a breach
" of contract. For had the special circumstances been known,
" the parties might have specially provided for the breach of
" contract by special terms as to the damages in that case,
" and of this advantage it would be very unjust to deprive

[11] 11

" them. The above principles are those by which we think
" the jury ought to be guided in estimating the damages
" arising out of any breach of contract."

It was similarly stated by Lord Blackburn in the House of
Lords in Livingstone v. The Rawyards Coal Company (1880) L.R.
(5 A.C. 25, at Page 39), in these words :—

" Where any injury is to be compensated by damages, in
" settling the sum of money to be given for reparation of
" damages you should as nearly as possible get at that sum of
" money which will put the party who has been injured, or
" who has suffered, in the same position as he would have been
" if he had not sustained the wrong for which he is now
" getting his compensation or reparation."

There is no doubt as to the law; the real difficulty is to apply it to
the peculiar facts of this case.

The first question is, " Was this loss one which could reason-
" ably be supposed to have been in contemplation by both parties
" at the time of the making of the contract as to the probable
" result of the breach? " This rule has often been criticised on
the ground that people when they make contracts do not contem-
plate their breach. Be that as it may, I have come to the con-
clusion that Lord Justice Greer was right in taking the view that
it would be naturally in the usual course of things, and would be
within the contemplation of the parties (1) that in circumstances
like those which happened in the present case, the Bank would be
compelled for their own protection to issue a public notice inform-
ing the holders of their notes that the only notes of which forgeries
had been discovered were the Vasco da Gama issue; and (2) that
they would also be compelled in the interest of their own credit and
currency to act reasonably in the matter, and (3) that it would be
reasonable to exchange any of those forged notes which were
presented for payment for valid notes of an equal value. Once
this is found, as it has in my view been rightly found in this case,
that the Bank acted reasonably, and it is also found that Messrs.
Waterlow committed a breach of contract, the resulting conse-
quences from such reasonable action must be damages which the
Bank are entitled to receive in respect of breach of contract,
because they are damages fairly and reasonably to be considered as
Arising naturally, i.e., occurring in the usual course of things from
such breach of contract, as the probable result of the breach.

As to (2), I now turn to the Last and, in my opinion, most
difficult part of the case.

Was the loss suffered by the Bank merely nominal and was the
only sum recoverable by them the cost of printing and paper in
regard to the new issue?

Upon this point Mr. Justice Wright said : " In Portugal these

" notes are currency. They are the currency of Portugal. They

" can purchase commodities in Portugal, including gold, which

" after all is only a commodity like any other, though it is raised

" in financial affairs to a special pre-eminence as a convenient

" medium for fixing values, they can buy foreign exchange, that

" is sterling or dollar exchange, they can buy any exchange in any
" currency which is convertible and they "do that because they

" have behind them the credit, that is the liability, of the Bank

"of Portugal."

And Lord Justice Greer states it in a similar way. He says :

" Every 96 Escudos issued by the Bank in form of paper notes in

" exchange for the Marang (forged) notes was worth £1 in English

" money, because it would buy in Portugal, and by exchange all

" over the world, the same amount of goods as the pound sterling

14824 A 6

12 [12]

" would buy. . . . In my judgment the Bank are entitled .to
'' say to the Defendants ' By your wrong I lost a certain number
" ‘of Escudos worth X pounds, give them back to me in English
" ‘ money at the rate of exchange at the date of my loss.'

In the present case the Bank, by reason of Messrs. Waterlow's
breach of contract, had to increase their note issue by 104,859,000
Escudos, and received in exchange for each bank note no value at
all, but only worthless bits of paper.

Upon each of the good notes so exchanged, the assets of the
shareholders were diminished to the extent of the liability which
the Bank assumed for the good note which they had given in
exchange for the worthless note.

Some confusion appears to me to have arisen in this case by
dwelling too much upon the fact that the notes were not convertible
into gold. In my opinion that fact has nothing to do with the
case. In a country where there is a managed currency a note when
issued by a Central Bank becomes part of the currency of the
country and obtains a certain value which may for the moment be
called its market value. The fact that it is not convertible into
gold is reflected in the price the note fetches in the terms of any
foreign exchange. We are not here considering the case of an
unlimited right to issue notes. The essence of the right conferred
on the bank of issue in this case was the ability, within limits
allowed by law, to print and issue its notes as currency and for
value. The notes are the currency of the country, and have the
value of that currency when issued. Whatever may be the con-
ditions imposed as to reserves and whether the currency is
convertible or inconvertible, a bank of issue receives value for every
note which it issues.

This consideration has to be kept in view during the whole of
the present case. It must never be forgotten that the Bank was a
bank of issue. The notes may be advanced as loans to the Govern-
ment or private persons; they may be used to buy gold or securities,
to discount bills or to pay the Bank's debts, and the notes may also
be received from a customer of the Bank in order to reduce an over-
draft at the Bank. In every instance the Bank obtains the currency
value of the notes, or may receive it, in discharge of a liability due

to the Bank

.

Analogies may be misleading, if not dangerous, in these peculiar
and unusual circumstances. The simplest way of posing the
problem is to imagine two persons coming into the Bank at, the
same time, each of them wanting a good 500 Escudos note. The
first is an Englishman who wants to get some Portuguese money.
He hands over to the Bank five English pounds, and gets in return
a 500 Escudos note. The other person hands over a forged note,
and also gets a 500 Escudos note. What is the position of the Bank ?
In the first case it has obtained in exchange for the 500 Escudos
note five pounds in English money; in the second case it has got
in exchange for the 500 Escudos note a worthless forged note.
It is not possible to say that in the second case the Bank has suffered
no damage because it could print and issue a third 500 Escudos
note should it so desire to do. For that note it could also have
obtained value. In truth it has lost the face value of the second
note by reason of the fact that it has only got a worthless note in
exchange.

I am, however, unable to accept in its entirety the argument
put forward by the Bank in their Reason 16, where it is stated
that the Bank's notes, being the currency of the country, have the
same value in their hands as in those of third parties. What
exactly is meant by the words "in their hands" it is difficult to
appreciate. A banknote is, after all, merely a promise to pay in

[13] 13

some form or other. Supposing the Bank had had in its cellars,
say, for example, 1,000 of these notes, and owing to the negligence
of some contractor who happened to be engaged in repairing the
premises, a fire had broken out and all the new unissued notes in
the Bank's cellars had been burnt, it would not be possible to
contend that the contractor whose negligence had. caused the loss
of the notes would be liable for their face value. He might in such
an instance be liable for the cost of paper and printing of each
note, but it is a completely different position when the notes,
instead of remaining in the cellar, are rightly, as is found in this
case in the circumstances, put into circulation by the Bank. Then
their value is entirely changed. Again, it is possible to conceive
of cases where a person who has been deprived of a chattel by the
negligence of another is entitled to recover from such other the
replacement value of such chattel, but the present case is not an
example of that character. Here the issue of the note and putting
it into the currency of the country, which the Bank were entitled
to do, makes all the difference.

For these reasons, I am of opinion that the Appeal of the Bank
succeeds and that judgment should be entered for the Bank for the
sum of £610,392. The appeal of Messrs. Waterlow should be
dismissed.

[14]

[15] 2

500$ each. They are known as notes of the Vasco da Gama type,
bearing as they do a portrait of Vasco da Gama on the face. These
600,000 notes as delivered were put into circulation by the Bank
in 1923 and 1924.

In 1925 the Bank and Messrs. Waterlow were made the victims
of an elaborate fraud on the part of one Marang and his associates,
and Messrs. Waterlow were induced, in the belief that they were
acting with the approval of the Bank, to print and deliver to
Marang 580,000 Vasco da Gama notes. These notes were exact
duplicates of the genuine notes printed under the contract, being
printed from the same plates or from plates made from the same
die. These notes were delivered to Marang as to 200,000 in
February and March and as to 380,000 in August and September,
1925, and large numbers were put into circulation by means of a
Bank known as the Banco Angola e Metropole, formed by the
conspirators for that purpose.

It is now common ground that in printing and delivering to
Marang the 580,000 notes Messrs. Waterlow committed a breach
of their contract for which they are liable to the Bank in damages.

There is no doubt as to the law applicable in such cases. It
is sufficient to quote the well-known rules laid down in Hadley v.
Baxendale 9 Exch. 341 in the judgment of Lord Blackburn:—
" We think the proper rule in such a case as the present is this :
" Where two parties have made a contract which one of them has
" broken, the damages which the other party ought to receive in
" respect of such breach of contract should be such as may fairly
" and reasonably be considered either arising naturally, i.e. accord -
" ing 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 breach of it." Moreover, it is well settled
that a voluntary act on the part of the injured party does not neces-
sarily break the chain of causation between the wrong which occa-
sioned the voluntary act and the damages. If the voluntary act is one
which would be reasonably expected in the ordinary consequence
of a breach of contract it is not a sufficient answer to say that the
damage would not have happened but for the Plaintiff's voluntary
act.

In the present case the introduction by reason of Messrs.
Waterlow's breach of contract into the currency of Portugal of a
large number of spurious notes indistinguishable from the genuine
notes would, if some drastic step had not been at once taken by
the Bank, have had an incalculable and disastrous effect on the
economic position in Portugal as well as on the reputation and
credit of the Bank, as the body responsible for the issue of currency.
As a consequence of the discovery, the result of investigations
made at Oporto on the 4th and 5th December, 1925, of. the fact
that a number of the spurious notes were in circulation, the Bank
on the Sunday, the 6th December, determined immediately to with-
draw from circulation the whole of the Vasco da Gama notes of 500$
and to have notices published in the papers of Lisbon and Oporto
advising the public that the cashing of the said notes would be
effected at once at the chief office of the Bank and at all its
branches. Such notices were duly published on the morning of the
7th December, and from that date onwards until the process was
stopped as hereinafter mentioned all notes of the type in question
whether genuine or spurious presented at the head office of the
Bank or at any branch or agency were exchanged for currency of
another type.

It is for the loss occasioned to the Bank by the exchange of
genuine currency that the damages in this action are claimed.

3 [16]

On this claim the following questions arise :-

1. Was the loss occasioned to the Bank such a loss as in
   accordance with the rules above referred to could be recovered
   in damages for breach of the contract ?

2. If so, what is the measure of such damages ?

3. Was there any and what date as from which by reason
   of matters coming to the knowledge of the Bank subsequently
   to the 7th December they ought as between themselves and
   Messrs. Waterlow to have ceased to exchange spurious notes
   for genuine currency and thus have minimised the loss ?

4. In what way and to what extent ought moneys recovered
   from the perpetrators of the fraud to be credited to Messrs.
   Waterlow in reduction of damages ?

The first question has been answered in the affirmative by all
the Judges in the Courts below, and I agree with their decision.
It is in my opinion impossible to say that, having regard to tine
position at the time, and the possible consequences both to Portugal
and to the Bank itself of the circulation of the spurious notes, the
action taken by the Bank in exchanging all the notes of the type in
question whether genuine or spurious for other genuine currency
was not a reasonable step to take, and one which might be expected
to be taken as a consequence of such a breach of contract as that in
the present case.

As to the proper measure of damages there has been a difference
of opinion in the Courts below. The majority (Greer and Slesser,
L.JJ.) in the Court of Appeal and Wright J. in the Court of first
instance were of opinion that the proper measure of damages was
the face value expressed in sterling of the genuine currency given
in exchange for the spurious notes, viz., in the present case £5 per
note of 500 escudos, together with the cost of printing the genuine
notes so given in exchange. Scrutton L.J. on the other hand was
of opinion that the loss was confined to the cost of printing the new
notes.

This is a difficult and in this case a very important question
seeing that in one view Messrs. Waterlow would be liable for a
very large sum of money, and in the other for nothing beyond the
£10,000 paid into Court with their amended Defence.

There are no principles applicable except such as are expressed
in Hadley v. Baxendale A. S. nor are there any authorities which
are of help- The damages are however damages for breach of con-
tract and in such cases it has to be remembered that they are
exclusively measured by a loss actually incurred by the Bank and
capable of being quantified in terms of money.

In reaching a conclusion it is essential to bear in mind that the
sole measure of damages on which the Bank insisted at the trial
and still insists is the face value, translated into sterling at the rate
of £5 for every sum of 500$ issued by them in exchange for
a spurious note. They have maintained throughout that in issuing
genuine currency in exchange for spurious notes they must be
treated as having expended so much cash without receiving any
consideration in return, and therefore to be the poorer by the amount
so expended. This is made quite clear by Reasons 16 and 17 in
their Case. They made no attempt to prove that (except the expense
of obtaining the paper and printing the notes) they incurred any
other loss or damage, directly or indirectly as for example by the
increase in the currency and the consequent depreciation of its pur-
chasing power, or by injury to their credit or interference in their
relations with the government or otherwise. All these considerations
may be set aside, and accordingly in explaining the views I entertain

[17] 4

by " damages " I mean only such damages as are claimed by the
Bank. There may be loss or damage of another kind but this is not
in question.

The whole question in my opinion turns on the nature of .the
obligation incurred by the issuing Bank under the notes it issues.
They are in effect promissory notes payable to bearer on demand.
So long as they remain in the possession of the Bank they are merely
pieces of paper, and if for example they were lost or destroyed
while in their possession they could be replaced by printing other
notes at the cost of the paper and the printing.

As soon as a note is issued it imposes an obligation on the Bank
to pay to the Bearer on demand 500$. This last is the only material
obligation in the present case. There may be two others, viz., (a) to
pay in gold should the notes hereafter cease to be inconvertible, and
(b) to pay in some new form of currency should any such new
form be introduced, but these possible obligations are contingent
only and are of no importance in the present case.

It is proved by the evidence of witnesses called on behalf of
the Bank itself that the only material obligation is satisfied by
exchanging the note in question for another note of like
denomination. If a judgment were recovered against the Bank it
would be satisfied by delivery of currency for the amount.

Where, therefore, the Bank elects, as it has done in the present
case, to treat the spurious notes as on the same footing as genuine
notes, all it does is to accept an obligation to pay the holders in
currency, that is to say, in notes. To do so all it has to do is to
take so many pieces of printed paper from its existing stock or to
have further notes created should the existing stock be insufficient.
In either case, the loss to the Bank is, in my opinion, confined to
the expense of procuring the necessary paper and of printing the
necessary number of notes.

Wright J., at p. 93 D, says: " They ", that is to say the
Bank, " are damaged by having to assume liability on these notes
" without getting anything in return. I think this argument is

" correct, and I think these notes must be taken for this purpose
" at their face value, just as they would be if they had been issued
" by some other institution that is not a Bank of issue." With
all respect, I cannot accept the conclusion of the learned judge. It
seems to me that by treating the Bank on the same footing as '' any

" other institution " he ignores the vital distinction, viz., that the
obligation incurred by the Bank is merely to pay in other currency
which it has power to create for the purpose, whereas the institu-
tion not a Bank of issue would have to procure the necessary cur-
rency by expenditure of money or sale of goods or in some similar
way or pay it out of currency already in hand. In fact, the 16th
Reason breaks down on examination, and its corollary the 17th falls
with it.

The next question viz :—at what point of time did the exchange
of genuine currency for spurious notes cease to be a natural result of
the breach of contract, in the view I take as to the measure of dam-
ages does not arise for decision, but if it did, T should agree with the
opinion expressed by Scrutton L.J. at page 131 of the Appendix
B. to F. He says : " As he (Wright J.) finds that the Bank were

' justified in their action on 7th December in calling in the issue
" and paying all notes, he must have found " (viz., in arriving at
the conclusion that they should have ceased on the 16th December
to pay all the spurious notes without distinction) " that they would
" have been justified, when they could distinguish the forged notes,

" which innocent holders could not do, in refusing to pay some forged
" notes, while paying others. Such an action in my opinion would
" destroy all confidence in the paper currency It (the

A9

14824

5 [18]

" unauthorised currency) was indistinguishable to innocent holders
" from genuine currency, and I cannot think the Bank was bound
" to sacrifice innocent holders and the reputation of the national
" currency to protect the printers, the wrong doers." I think the
right, as against Messrs. Waterlow, continued until the 26 De-
cember.

Under the circumstances no question arises as to the sum re-
covered from other persons.

The result is in my opinion that the Appeal of the Bank should
be dismissed with costs, and that of Messrs. Waterlow should be
allowed with costs.

I need hardly say that it is with great regret after anxious con-
sideration, I have arrived at the conclusion that I must differ from
opinions, for which I have the greatest possible respect, but it is
some consolation that I do so in good company. I should also like
to say that I have been much assisted by the very clear and forcible
argument of Mr. Gavin Simonds in reply.

[19]

BANCO DE PORTUGAL.

v.

WATERLOW & SONS.

Lord Atkin.

In this case your Lordships are, I think, agreed that as the result
of the breach of contract by Messrs. Waterlow, the Bank of Portugal
issued 209,718 500 escudo notes in exchange for forged notes
innocently printed by the Defendants. The question is what damages
can be recovered by the Bank. The contention of Messrs. Waterlow
is that the Bank, when it issued good notes to the face value of over
100 million escudos in return for no consideration, suffered no
damage at all except the cost of printing the good notes. This would
have appeared to me a departure from the ordinary principles of
assessing damages; but it has found favour with more than one
judicial personage for whose opinions I have unfeigned respect,
and was urged with much apparent zeal by eminent counsel: so that
obviously it demands careful examination. The difficulty, it
appears, only arises where the person issuing the notes is a
Bank of issue and where the obligation expressed in the note
is not to pay in gold but to pay in paper currency, i.e. other
notes of the Bank. In such cases it is said the Bank have
only parted with bits of paper and their damage is completely
measured by the cost of reprinting the bits of paper. The
argument strikes home at the present time where our currency
is in the main a paper currency, and where the Bank of
England are under no liability to pay their notes in gold. I hope
to satisfy your Lordships that if the Bank of England by fraud
or breach of contract are induced to issue a million pounds worth of
notes for nothing they are entitled to recover against the wrongdoer
a million pounds in damages. The result of the present contention
is sufficiently striking. If the issue of $10,000 good notes by the
Bank of Portugal for nothing involves them in no loss, it would
seem to result that the issue of a similar amount for goods or obliga-
tions of an equivalent value would be complete gain. The Bank,
therefore, when it creates a good debt for $10,000 by advancing
that amount in notes to its customer will appear to have increased
its assets by $10.000 without adding to its liabilities; similarly,
when with the same sum it buys a £100 gold bond or the equivalent
amount of bullion. It follows that it makes no difference to the
financial position of the bank whether in exchange for a good
note it receives a good note or a bad note. I should
have thought this result, in the language of one of your
Lordships " manifestly impossible " : but rules of law have to be
tested in these days, and must survive the application of first
principles.

A Bank note is a promissory note issued by a Bank payable on
demand. The English note contains the promise on the face. The
Portuguese note does not, but there is competent evidence in this
case that the note has the same effect. So far the banker issuing
his note incurs precisely the same liability as a merchant issuing
his note. If either fails to pay he is liable for the face value of the
note. One Bank becomes alone entitled to issue notes; and let
us assume that they have become currency so that they can be
tendered in discharge of a debt: the position of the Bank remains
the same- It is liable on its note. If its note is payable in gold
then to a claim on a note the Bank must pay in gold : otherwise on

2 [20]

debts in general the Bank as well as private traders will pay in
currency: and as I have said on default will be liable to judgment
for the face value. In any civilised State it will not be permitted
to issue notes to an unlimited amount: it will, if honestly conducted
in any case determine its obligations by its possible resources: but
the State will require that behind the promises to pay there stand
solid resources in the form of gold and liquid securities: and will
impose a positive restriction on the issue of notes beyond an amount
which it considers necessary. But this has no bearing on the liability
of the Bank to pay the face value of a note when issued.' Now let
us assume that the State alters the law by decreeing that the Bank
notes need no longer be paid in gold. While that decree lasts the
notes are inconvertible, the currency is in the ordinary sense a paper
currency. This happened in Portugal in 1891 by a moratorium
directed to payment in gold which has been continued in Portugal
ever since. The position has not altered. The merchant is in pre-
cisely the same position as before : he must pay in currency which
will as before be notes but now inconvertible notes. If he fails to
pay he can be sued for the face value of his promissory note. The
Bank is for the first time put in the same position as the merchant:
it is bound to pay on its note: but it need only pay its note in
currency, i.e., in its own notes: and if it will not or can
not so pay, it can be sued for the face value of the note.
Mr. Simonds for Messrs. Waterlow produced an analysis of the
obligation of the Bank in issuing an inconvertible note with which
in substance I agree. It is 1. to pay in other notes, 2. when there is
a return to gold to pay in the decreed amount of gold, 3. if other
currency is decreed to pay in that other currency. But how this helps
him it is difficult to see : for on examination it will be found that
the obligation of a trader on his note is precisely the same, except
that 2. will probably only be to pay in notes convertible into gold
instead of paying in gold itself. Now in the case of a private trader
it appears to be conceded that his loss in similar circumstances would
be measured by face value. On this analysis the obligation of the
Bank would appear to be the same. That it meets its obli-
gation on its note by issuing a further note seems to have
no effect upon the nature or amount of the original obligation :
the original obligation is met by a renewal, the Bank have only
gained time, not increased or decreased an obligation which would
be measured just as before. They have in fact done exactly what
the merchant has done; they have paid in currency; and their
obligation is measured in the same way. If they had an unrestricted
right of issuing notes their obligation would not be altered: they
would still be liable to be sued on default for the face value of the
note, but the effect of the unrestricted power would presumably be
that the face value of the note would have a much lower exchange
value than if there were a restricted power : so that the Bank
would either have received little value originally or the holder of the
note would intermediately have suffered loss on the diminution of
the note value. But in fact in the ordinary course of civilised
government, as in Portugal, restrictions still continue. In the
present case in 1925 the issue of notes by the Bank for commercial
purposes was restricted to $195,000,000 of which they had issued
$64,000,000. leaving a power to issue of $131,000,000. In addition,
the State from time to time had authorised the Bank to issue notes
for State purposes supporting these notes by a borrowing from the
the Bank secured by State marketable bonds. Restrictions as to pro-
portions of gold and securities reserves still continued in existence
so far at any rate as the issue for commercial purposes was con-
cerned. Let us assume, as might well have happened, that the
forged issue instead of amounting to $100,000,000 had amounted to
$131,000,000 If the Bank had taken the same action they would
have issued promissory notes to the full extent of their legal power.

[21] 3

When sued on the notes so issued in exchange for the forged notes
they could not have issued their notes in payment; they could
have been sued for $131,000,000 and judgment must have gone
against them for that sum. Of course, this never would have been
permitted by the State, but ex post facto relief has nothing to do
with the question of legal obligation. I therefore find the posi-
tion to be that the Bank by issuing its note like the trader issues
its promise to pay a fixed sum; issues a bit of its credit to that
amount; like the trader, it is bound to pay the, face value in
currency; like the trader it is liable on default to judgment for
the face value exigible out of its assets; and, like the trader, if it
is compelled by the wrong of another to incur that liability, its
damages are measured by the liability it has incurred.

It may be noted that this liability to pay the face value is not
in the least affected, as has been suggested, by the question of
convertibility. Whether the obligation is to pay in gold or in
paper, the liability remains the same to pay 500 escudos, and a
judgment on the note would be for precisely the same sum. The
exchange value and the face value are quite different matters. 500
escudos in gold will exchange for many more goods and much more
foreign currency than 500 escudos in paper; as Messrs. Waterlows
would have found to their cost, if they had printed these notes
when they were convertible into gold. The damages then claimed
would have been twenty million pounds sterling instead of a million.
Another way of illustrating the position seems to be this.
If a person is wrongfully induced to part with a valuable thing,
whether it be goods or choses in action, his measure of damages is the
value of the thing at the time he parted with it. The cost of
replacement does not enter into the measure of damages at all. If
a. man is fraudulently induced to part with 500 standards of timber
he recovers the value at the time; it is quite immaterial that he
could have replaced the timber, say, from the Russian market, at
a small portion of the value. If he manufactures for 1d. articles
which can sell for 6d. the measure of damages against the wrong-
doer is 6d. not 1d. So if he was by fraud induced to promise to
deliver 500 of the 6d. articles so that the contract could be enforced
by an innocent holder of the contract it appears to me that on well-
established authority the damages would be £12 10s. not £2 1s. 8d.
This means that whether he parts with goods or parts with an
obligation, the measure of damages is the market value of what
he parts with, which means what it will exchange for; and this
necessarily means in the case of an obligation expressed in currency
of the country the face value of the obligation. If he incurs an
obligation to pay pounds sterling, you do not inquire at what cost
he will acquire the pounds sterling necessary to fulfil the obliga-
tion; he may get them by getting some one to produce an article
at much less cost which he can sell for the equivalent sterling; he
may get them from a benevolent uncle or from someone who for a
small premium has undertaken to make good his loss. Whatever
the liability incurred, the measure of damages is market value,
which in the case of an obligation to pay. currency is face value.
Some confusion has been introduced into the discussion by con-
sidering the question as though the Bank had " lost " the bank-
notes. If the notes had been " lost " before the Bank had made
them the Bank's contractual obligation by delivery the proposi-
tion of the Defendants would be correct. The notes in such a case
are nothing but a collection of bill stamps completed but not
delivered; to destroy them would but have the same result as burp-
ing a man's cheque-book whether the cheques ,were filled up
and signed or not. I doubt myself whether Reason 16 of the
Bank's case ever meant to contend anything so unsound as is
suggested; it was probably meant to be read together with the rest
of the reasons. But I am quite satisfied that such a fallacy never

4 [22]

entered into the head of such an experienced lawyer as Wright, J.
Throughout his judgment he is speaking of the liability of the
Bank on the notes, and he finishes his judgment on this point by
these words: " They say they were damaged by having to assume
" liability on these notes without getting anything in return. I
" think this argument is correct, and I think these notes must be
" taken for this purpose at their face value just as they would be
" if they had been issued by some other institution that is not a
" bank of issue." I have already stated my grounds for believing
this statement to be correct. For my part I cannot see the way
to decide this case for Messrs. Waterlow without reversing a number
of authorities which have governed our commercial law as 1 under-
stand it from earliest times.

There is one final and conclusive proof of the fallacy of the
Defendants' contention to which I have not yet heard any answer.
By issuing a note the Bank provide the holder of it with a piece
of currency which he can bring to the bank the next day and compel
the bank to receive in discharge of his overdraft or in payment under
a contract to buy securities or bullion. By issuing 100 million
escudos in notes they provide the public with the means of coming
to the bank and depriving it of 100 millions' worth of assets in
debts, securities and gold. I say debts, for even Messrs. Waterlow's
contention does not suggest that a debt payable in paper currency
is worth nothing, or that if the debtor is solvent it is not worth its
face value. If the bank releases a debt of 500 escudos it loses 500
escudos. If it parts with 500 escudos' worth of gold it loses 500
escudos: but if it issues for nothing a 500 escudo note to-day by
the return of which to-morrow the debt of 500 escudos is discharged
or the 500 escudos' worth of gold is bought and paid for it loses
nothing. I refuse to proclaim to business men in this country or
abroad that our law is so unreasonable. It is with respect no
answer to say that when the note is returned it can be used again
for value. In fact, strictly speaking, it is not available : the note
when returned is discharged, and the reissue of it creates a fresh
obligation : but the answer to that suggestion is that notes issued
for value can also, when returned, be reissued : so that the conten-
tion again amounts to this, that - note + value = - note, a pro-
position which I do not wish to qualify with an epithet.

On the general question as to the number of notes in respect of
which damages are to be claimed which turns upon the day upon
which it could be said that the bank no longer reasonably could con-
tinue to pay good notes for bad, I agree entirely with the view
expressed by Scrutton L.J. I put the question in that form, for it
was conceded at the bar that at any rate there were some days at the
beginning in which the bank's action was reasonable and was the
natural result of the Defendant's default. Without such a con-
cession I think the views expressed by all the judges below correct
on this point. The majority of the Court of Appeal limited the
damages by fixing on December 10th as the day upon which the
Bank could have obtained full information if they had acted reason-
ably. I cannot agree with this. It seems to me disproved
by the fact that Messrs. Waterlow though on December 9th
they had reason to suspect the Marang transaction did not
in fact give the necessary information on that day or the 10th,
though they were in fact writing to the Bank on that day; in fact,
they never imparted the relevant information at all except in a
deposition to the Police Magistrate. I also think that the trial judge
with whose admirable judgment I agree on almost every other point
took too early a date for closing the transaction. It seems to me that
once the exchange began it had to continue until the end of the
period fixed by the Bank in conjunction with the Government,
which is December 26. On the whole I think that notes exchanged
after that date must be treated as benevolences by the Bank.

[23] 5

It only remains to consider how far the damages are to be re-
duced by the sum recovered from the actual conspirators, a sum of
about £400,000. Mr. Justice Wright has apportioned this sum over
the total loss of the bank thus reducing proportionately so much of
the total loss as has been recovered from Messrs. Waterlow. This
seems to me to be incorrect in principle. The Bank's claim against
Messrs. Waterlow would be say £1,000,000, but they cannot recover
more from the Defendants than their nett. total loss. This is to be
ascertained by taking the total amount of their loss not merely that
part of it which is recoverable from Messrs. Waterlow, and deduct-
ing from the total the amount recovered elsewhere. This is the
principle laid down in The Blackcock 1900. P. 1, where a ship was
injured by the negligence of both tug and tow. The owners recovered
judgment for the full amount of the damage from the tow, but only
obtained a sum of £850 from the proceeds of the judgment: they
then proceeded against the tug and it was found that both were to
blame; the Plaintiffs therefore were only entitled to half their
damage, about £2,000. But it was held that the Defendant was not
entitled to credit for either the whole or a proportionate part of the
£850, for the two sums together did not make up the total loss. The
decision seems to fit this case exactly and I think is rightly decided.

The result is that the Banks total loss on 209,718 false escudo notes
paid by the Bank at the agreed rate of exchange is ... … £1,092,281
To this must be added the cost of the genuine
notes printed by Waterlows and rendered
valueless ... ... ... ... ... ... ... 6,541

1,098,822

The total amount recovered from the con-
spirators is agreed at ... ... ... ... ... 488,430

The Bank's nett loss is therefore ... ... ... £610,392

The actual notes paid up to December 26 exceed 200,000, so that
the total claim against the Defendants without any credit far
exceeds £610,392. The result is, after being given credit against
the total loss suffered by the Bank, the Plaintiffs are entitled to
judgment for £610,392. In my opinion, therefore, the appeal of
the Bank should be allowed, and the judgment of the Court of
Appeal should be set aside, the judgment directed by Mr. Justice
Wright to be entered for the plaintiffs should be varied by in-
creasing the sum there mentioned to £610,392, and the Plaintiffs
should have the costs here and in both courts below. The appeal
of the Defendants should be dismissed with costs here and in the
Court of Appeal.

[24]

Both in the Court of Appeal and in this House, Waterlows
admitted that their contract with the Bank of Portugal contained
an implied term that they would not print or deliver Bank of
Portugal bank notes without the authority of that Bank, that in
printing and delivering the notes to Marang they had committed
a breach of that term, and that they were liable to the Bank in
damages for that breach. The case was still further narrowed
here, because the Bank based their claim to damages solely upon
breach of contract. The arguments related only to the amount of
such damages; other matters which have at one time figured in the
case, such as conversion, negligence and passing off, may be
disregarded.

The case divides itself into two very distinct branches, viz.,
1°, consideration of the question whether the Bank have proved that
Waterlow's breach of contract has caused them damage beyond a
certain sum of £8,922; and 2°, consideration of the conduct of the
Bank in treating Marang notes as if they were authorised notes,
particularly in relation to the question whether any date can be
fixed on or after which the Bank could no longer so act at the
expense of Waterlows.

The sum of £8,922 above mentioned represents the cost of
printing (a) the genuine notes which were withdrawn from
circulation and (6) the notes which were given in exchange for
Marang notes. This damage, it is admitted, the Bank suffered.
To that extent damage, as a result of Waterlows' breach of contract,
was proved.

I will start with the first branch, which raises a problem both
novel and difficult.

The Bank's claim is simply this:—That having given 209,718

good notes in exchange for mere bits of paper, they have lost the face

value of each note so given in exchange. The loss of 500 escudos is,

according to the Bank, the inevitable consequence of the gift of the

note. The language in which this loss is expressed varies at

times. In paragraph 31 of the Bank's case here it is stated that :

" The Bank claim the value of the escudos which they had to part

" with for nothing." In paragraph 39 they say:—" The Bank

" paid out 104,859,000 escudos in exchange for unauthorised notes.

" At . . . . the then rate of exchange the sterling equivalent

" of this sum is £1,092,281." They treat the matter as though.

[25] 2

being the owners of assets worth over a million sterling, they had
parted with those assets (or had incurred an immediate liability to
part with assets of that value) receiving nothing in return. There-
fore they claim that they did in December, 1925, suffer, and have
now suffered, damage to that amount.

Wright J. accepted this view. As I read his judgment he
treated bank notes while in the hands of the Bank as of the same
value as in the hands of any other person, and held that the Bank
therefore lost that value when they issued a note in exchange for a
Marang note. The pith of his judgment upon this point is con-
tained in five lines in which he says :—-" They say they are damaged
" by having to assume liability on those notes without getting any-
" thing in return. I think this argument is correct, and I think
" these notes must be taken for this purpose at their face value just
" as they would be if they had been issued by some other institution
" that is not a Bank of issue." Those five lines are the basis of his
judgment on this head, and are re-echoed in the 16th reason of the
Bank's case here, viz., " Because the Bank's notes being the
" currency of the country have the same value in their hands as in
" those of third parties.

Greer L.J. says:—" Every time they issued good notes to the
" value of 500 escudos in place of worthless notes, they lost the
" market value of 500 escudos." In another passage he phrases
it thus:—" In my judgment the Bank are entitled to say to the
" Defendants, ' By your wrong I lost a certain number of escudos
"' worth X pounds, give them back to me in English money at
"' the rate of exchange at the date of my loss.' " And, the Lord
Justice makes this additional statement:—" If my purse' con-
" taining £5 is stolen I do not recoup my loss because I have an
" unused balance in my bank out of which I can draw by cheque
" another £5. The damage I have suffered is still £5, not merely
" the 2d. I have to pay for the cheque form." Here again is
Reason No. 16.

Slesser L.J. seems to rest his judgment on the question whether
the Bank had established damage beyond cost of printing, upon a
two fold basis. His language is as follows :— ' Now in the case
" of the issue to cover the exchange of the Marang notes, the
" Bank received nothing in respect of this issue. To all intents
" and purposes it gave away 209,01)0 odd notes, worth on the
exchange about £5 each, receiving nothing in exchange; and I
" cannot see in these circumstances—the notes of Portugal being
" currency within that country and exchangeable as we are told at
" 96 escudos to the £ in London—why the Bank cannot say that by|
" being compelled -to issue this currency for no value, and thus
" proportionately to deplete their further power to issue, they have
" suffered damage to the extent of this value of the notes."

All three judgments are founded upon this view:—That the
Bank in December, 1925, suffered damage to the extent of over a
million pounds sterling, by having in that month paid away
104,859,000 escudos.

If this view correctly represents the position, then the Bank
would on the giving of each good note in exchange for a bad note
become in fact poorer by the face value of the good note, and there
could be no doubt that damage to that amount had been sustained
by the Bank. But in my opinion this view does not represent
the facts, but overlooks the exceptional situation which arises when
a Bank of issue issues notes constituting an inconvertible currency.
It is necessary to state a few facts as they existed in December,
1925, in order to appreciate the situation at that time.

The Bank were a Portuguese Joint Stock Company which acted
as Bankers to the Portuguese Government, and which ever since
1887 had enjoyed an exclusive license to issue their own notes as the

3 [26]

only legal currency in Portugal. The capital of the Bank was
13,500,000 escudos in fully paid shares with limited liability.
There were two species of issue and of notes in circulation, viz.,
one destined for the banking operations of the Bank, the other
applied as loans to the Treasury. The limit of the right of issue
for banking operations was between 195 and 196 million escudos;
notes for this purpose had in fact been issued to an amount between
64 and 65 million escudos. leaving an unexhausted power of issue
to an amount of about 131 million escudos. Notes issued on
Government account amounted to 1,640 million escudos, so that the
total issue of authorised notes amounted in December, 1925, to a
face value of 1,704 million escudos or thereabouts. The loans to
the Government bore interest only at 1 per cent, per annum of which
5/8ths fell to a sinking fund. None of the Bank's notes were payable
or redeemable in gold or silver. A period of inconvertibility had
been established in 1891 and was still continuing with no likelihood
of its ever being determined. The only liability of the Bank, so
far as concerns paying or redeeming a note when presented at the
Bank, was to give in exchange for it another note or notes of
equivalent face value. Each note when issued by the Bank became
in the hands of the holder legal tender, and any such note if paid
to the Bank by a debtor to the Bank must be accepted by the Bank
in discharge pro tanto of the debt.

That being the condition of affairs, when the Bank gave a good
unissued note in exchange for a Marang note did they become
poorer to the amount of 500 escudos either by parting with 500
eseudos or by incurring an immediate liability to part with
500 escudos ? That appears to me to be the crucial question : and
the answer seems to me to depend upon a correct appreciation of
what happened when the Bank issued the good note to the holder of
a Marang note, and a correct statement of the obligations which the
Bank assumed by the issue of that good note.

As already pointed out, Wright J. and Greer and Slesser L.J.J.
were of opinion that the Bank in issuing the note were parting with
500 escudos. It is true that Wright J. also refers to the Bank
assuming a liability in issuing the note, but I think he bases his
judgment on the former view for he expressly treats the case as if
it were just the same as a case where a bank has been deprived of
a note issued by some other authority.

In my opinion the Bank parted with no escudos. They issued
something which in the hands of the recipient was currency of
Portugal and legal tender for payment of indebtedness up to 500
escudos, the form of that currency being, not any metal or other
substance of value, but a piece of paper by virtue of which an
obligation was incurred by the Bank to the holder thereof. While
that something was in the possession of the Bank it could have no
value assigned to it, for an obligation by one to himself is nothing
worth. The value attaches to the note when it is issued to the
holder; but the value does not quit the Bank, and leave the Bank
so much poorer. The value attaches to the note when the Bank
issue it, and thereby undertake an obligation to the holder. The
Bank are affected not by the parting with anything which they
possessed but by the incurring of an obligation.

My Lords, that in my opinion is an accurate statement and a
complete statement of what happened when the Bank issued a
good note to the holder of a Marang note. If that be so then it
must follow that the judgments below cannot stand, in so far as
they are based upon the view that the Bank parted with or lost
escudos to the amount of the face value of the good notes which
were given in exchange for Marang notes. In truth this view was
the outcome of the erroneous belief that there was no distinction
to be drawn between a note of the Bank of Portugal in the

[27] 4

possession of that Bank, and the same note in the possession of
another Bank or individual: a belief which in terms emerges in
the judgments of Wright J. and Greer L.J. and which underlies
the Bank's 16th reason.

This belief is clearly ill founded. This was indeed admitted in
your Lordships' House; and the Bank's argument proceeded upon
the footing that by reason of the obligation incurred by the Bank
in issuing a good note and of the fact that they had received nothing
in return, they had necessarily suffered damage to the extent of the
face value of the note. I say " necessarily " for the Bank made no
attempt to prove this by evidence. It must, if the Bank are to
succeed, be a case of the thing speaking for itself. I have to deal
with this in some little detail, because it appears to me that with
the disappearance of reason 16; there disappeared also the Bank's
only basis for claiming the face value of the notes, without giving
affirmative evidence of the damage which they had sustained.

What then was the obligation which the Bank incurred ?

Mr. Gavin Simonds, in the course of an admirable argument
which leaves me much in his debt, defined this obligation with I
think complete accuracy. It is threefold, viz. :—1". To give in
exchange a note or notes of equivalent face value each carrying a
similar obligation. 2°. If and when it is hereafter decreed that
the notes are to be redeemed in gold, then on demand such quantity
of gold as may be decreed. 3°. If and when it is hereafter decreed
that some new form of currency shall be legal tender, and that the
Bank's notes are to be paid in such currency, then on demand to
pay the proper amount of such currency.

The problem then is to quantify those obligations in terms of
money. What is the sum which will compensate the Bank for being
forced to undertake those obligations ? How much worse off is the
Bank likely to be by having to fulfil them ?

To say that by having to fulfil them the Bank will necessarily
be worse off by the face value of each note given in exchange for a
Maraug note seems to me, with all respect to those who think other-
wise, manifestly impossible. Such a conclusion should surely be
based upon some evidence. Could any evidence hope to establish it ?
For myself I can see no such possibility. The first obligation
tarries no loss to the Bank except the cost of providing the new note.
The second obligation is so far removed from actuality that both
the Courts below treat it as a nominal matter. The third obligation
is purely contingent and even hypothetical. But let me again
remind the House that even if some appreciable degree of damage
could arise to the Bank by the assumption of this threefold obliga-
tion, it was incumbent on the Bank to prove it. This task they
never attempted.

It was, however, argued that damage had accrued to the Bank
in other ways by reason of their having been forced to issue notes,
getting nothing in return.

It was said that the Bank had assumed an obligation, getting
nothing in return. That is true. It was then said that the value
of that obligation was the value of the note in the market, viz.,
500 escudos. The same argument assumed another form, viz., that
the sum in sterling which the Bank claimed to recover from
Waterlows was the exact amount which it would have cost
Waterlows at the relevant date to purchase 209,718 notes in order
that the Bank's liability thereon might be cancelled. When the
value of the obligation is alleged to be value of the note, that can
only mean that that is the value to the note-holder of the fulfilment
by the Bank of their obligation. It by no means follows that
500 escudos represents the cost to the Bank of that fulfilment. But
in assessing damages for a breach of contract the question is not

[29] 6

of deciding that the Bank have not proved that they have suffered
the enormous damages which they claim to recover from Waterlows.
I confess, however, that I derive some consolation from the know-
ledge that, in this alleged act of violence I am abetted by one whose
pre-eminence as a commercial lawyer is both well-established and
long established.

Upon this part of the case I am in agreement with the view
expressed by Scrutton L.J., viz., that the judgment of Wright J.
should be set aside and judgment entered for the Bank for the sum
of £8,922. I would accordingly allow tine appeal of Waterlows
and dismiss the Bank's appeal.

A majority of your Lordships, however, think otherwise and are
of opinion that the Bank have proved that in issuing a good note in
exchange for a Marang note they suffered immediate damage to the
amount of 500 escudos. Waterlows upon that footing are prima
facie liable to the Bank in the sum of 104,859,000 escudos or (con-
verted into sterling at the appropriate rate and date) £1,092,281.
This indeed would appear to be something in the nature of a wind-
fall for the Bank; for the introduction into a total issue of 1,704
million escudos of less than 105 million bastard escudos will have
resulted in the Bank recovering a sum amounting to more than seven
times their paid up share capital.

There remains the question whether in the circumstances of this
case a date can be fixed by reference to which the Bank were not
entitled to charge Waterlows with the damage sustained by reason
of the exchange of good notes for Marang notes subsequently thereto.

Wright J. fixed such a date as the 16th December, 1925. Greer
and Slesser, L.JJ. fixed it as the 9th December, 1925. Scrutton
L.J. fixed it as the 26th December, 1925, being the date which by
the Bank's public notice, issued in concert with the Government,
was fixed as the last day on which Vasco da Gama 500 escudos notes
would be exchanged.

Upon this part of the case I do not intend to trouble the House.
At this point my dissent comes to an end, and we all find ourselves
in agreement with Scrutton L.J.

The circumstances of this case are very exceptional. The
forged notes only fail to be real because their printing was
unauthorised. They were printed from the Bank's own plates.
Long before there was any possibility of detection they had been
circulating in large quantities. Numbers of them may have obtained
the status of validity by having been received and reissued by the
Bank and its numerous branches. There was no possibility of as-
certaining which Marang notes had in this way acquired enforceable
rights. This feature of reissue strikes me as being of over-riding
importance.

In these circumstances I am of opinion that it cannot be
effectively contended either that the Bank should not (down to and
including the 26th December, 1925) have honoured all Marang
notes, or that such damages as flowed from that course of action
are not damages which fall within the test of Hadley v. Baxendale.
and for which Waterlows are liable.

[30]

There is already on record in the admirable judgment of
Wright, J., an adequate account of the fraud perpetrated by
Marang and his fellow conspirators on Messrs. Waterlow & Com-
pany and the Bank of Portugal. It is therefore unnecessary to
detain your Lordships by recounting afresh the dramatic circum-
stances of a crime for which in the ingenuity and audacity of its
conception and execution it would be difficult to find a parallel. The
present appeals are concerned with the civil consequences of that
crime and in particular with the estimation and attribution of the
loss which it has occasioned.

As regards Messrs. Waterlow & Sons, the result of the fraud
practised upon them was to cause them, without the authority of
the Bank, to print 580,000 Bank of Portugal notes of 500 escudos
each of the Vasco da Gama type from the plates which were in their
possession as the Bank's printers and to place these unauthorised
notes at the disposal of the conspirators. As regards the Bank, the
result of the fraud was the debasing of the currency of Portugal,
for the validity of which the Bank as the central bank of issue of
the country was responsible, by the introduction into it by the con-
spirators of a large number of these spurious notes.

It was conceded by Messrs. Waterlow & Sons that it was an
implied term of the contractual relationship subsisting between the
Bank and themselves that they should not print notes from the
plates in their possession except on the direct orders of the Bank.
As they in fact printed and delivered 580,000 notes to the con-
spirators without any order from the Bank, there can be no
question, and it was indeed frankly admitted by Messrs. Waterlow
& Sons, that their action in so doing constituted a breach of their
duty to the Bank. For any loss attributable in law to this breach
of duty which the Bank can prove that it has suffered Messrs.
Waterlow & Sons admit liability. The debate at your Lordships'
bar consequently centred round the problem—What loss for which
Messrs. Waterlow & Sons are legally responsible has the Bank of
Portugal sustained by reason of the unauthorised printing and
introduction into the currency of Portugal of the spurious notes in
question ?

Now it was admitted that the Bank on discovering that a large
number of spurious notes had been surreptitiously introduced into
the currency of Portugal was not only entitled but bound in its own
and the public interest to adopt remedial measures for the protection
of the currency. The step which it took was to publish at once a
notice intimating that it had resolved to withdraw from circulation

[31] 2

the entire vitiated issue of 500 escudo Vasco da Gama notes in the
hands of the public and on their presentation at the head office or
branches of the Bank to give other notes in exchange for them. In
pursuance of this notification the Bank honoured all the 500 escudo
Vasco da Gama notes which were presented to it for exchange,
spurious and genuine alike. That the withdrawal of the whole
issue was a reasonable and indeed the only practicable step for the
Bank to take in order to remedy the situation which had arisen was
hardly contested by Messrs. Waterlow & Sons. They directed their
criticism rather to the way in which the Bank carried out its policy.
In the first place they argued that the Bank acted precipitately and
that if it had delayed the announcement of the withdrawal of the
notes for a short time the means of discriminating between the
spurious and the genuine notes, which admittedly the Bank did not
at first possess, would have been available to it and it could have
refused to honour the notes ascertained to be spurious. In the next
place they argued that if the Bank had at first no alternative but to
honour spurious and genuine notes alike by reason of its inability
to distinguish between them, it should have ceased to honour the
spurious notes whenever it had acquired or could have acquired the
means of discrimination. Neither of these criticisms of the Bank's
action is in my opinion warranted. The Bank in my view was
justified in taking immediate action when it did, for the fact of the
existence in the currency of a large number of spurious notes became
a matter of public knowledge almost simultaneously with its
discovery by the Bank and if a panic was to be averted it
was essential to take action at once. I equally think that having
properly announced the withdrawal of the notes and its intention to
honour all such notes in the hands of the public, it was not possible
for the Bank to alter its policy until a reasonable time had been
given to the public to effect the exchange. To have honoured the
spurious notes so long as it could not tell them from the genuine
notes and then to cease to honour them when it acquired or might
have acquired the means of discrimination would have created a
second panic and such a course of conduct on the part of the Bank
would have been, grossly unfair. If the only way to avoid a panic
was to honour good and bad notes alike, as I think in the circum-
stances it was, the Bank's ability to distinguish between them
becomes an irrelevant consideration. Moreover tlhe Bank was quite
unable to say with regard to any particular spurious note presented
to it whether it had not itself unwittingly reissued it into circula-
tion and so become responsible for it.

I confess I am not disposed to regard with much sympathy the
criticism which Messrs. Waterlow & Sons have directed at the
Bank's action. Where the sufferer from a breach of contract finds
himself in consequence of that breach placed in a position of
embarrassment the measures which he may be driven to adopt in
order to extricate himself ought not to be weighed in nice scales at
the instance of the party whose breach of contract has occasioned
the difficulty. It is often easy after an emergency has passed to
criticise the steps which have been taken to meet it, but such
criticism does not come well from those who have themselves created
the emergency. The law is satisfied if the party placed in a difficult
situation by reason of the breach of a duty owed to him has acted
reasonably in the adoption of remedial measures and he will not be
held disentitled to recover the cost of such measures merely because
the party in breach can suggest that other measures less burdensome
to him might have been taken. On this part of the case I find
myself in agreement with the reasoning of Scrutton, L.J. In my
opinion the action of the Bank in honouring all notes of the type in
question, genuine and spurious alike, between 7th December and
26th December, 1925. was reasonable and justifiable in the circum-
stances and Messrs. Waterlow & Sons ought to be held responsible

3 [32]

for whatever loss was occasioned to the Bank by the adoption of that
policy. I have taken the 26th of December as the limiting date, for
that was the date which the Bank itself fixed and I think that it was
proper to specify a time-limit for the presentation and exchange of
the notes. In so far as the Bank voluntarily continued to honour
notes presented after 26th December I am of opinion that it should
not be allowed to lay the cost of doing so to the charge of Messrs.
Waterlow & Sons.

The problem thus now narrows itself to the ascertainment of the
loss which the Bank incurred by reason of its having honoured
spurious 500 escudo notes of the Vasco da Gama type between 7th
December and 26th December, 1925.

In all 799,190 of the notes, including both the genuine and the
spurious ones, were withdrawn from circulation. This figure
includes those withdrawn after 26th December. Of the 799,190
notes it has been ascertained that 209,718 or 26.241 per cent, were
spurious. Up to 26th December, the total number withdrawn was
791,533. Jf the percentage of 26.241 be applied to this figure the
result is that between 7th December and 26th December 207,706 may
be taken as the number of spurious notes which the Bank honoured
between these dates. Consequently the loss which the Bank is
entitled to attribute to Messrs. Waterlow & Sons' breach of contract
is the loss which it incurred by issuing good notes in exchange for
207,706 spurious notes. That is the measure in law of the liability
of Messrs. Waterlow & Sons to the Bank.

The problem of assessing this loss necessitates an excursion into
the controversial region of banking finance. What the Bank
actually did was to give good and valid notes in exchange for
entirely worthless notes. What loss did this occasion to the Bank ?
On the one hand it is submitted that all that the Bank lost was the
negligible cost in paper and printing of the good notes which it gave
in exchange for the spurious notes. On the other hand it is sub-
mitted that the Bank lost the full face value of these good notes so
given in exchange.

Your Lordships were presented with a choice between these two
extremes. No possible middle course was suggested. Which is
right? If neither were held to be right the action would have to be
dismissed, for neither evidence nor argument was adduced in
support of any alternative other than the two I have stated.

The argument which was presented with admirable lucidity and
much cogency by Mr. Gavin Simonds on behalf of Messrs. Water-
low & Sons and which prevailed with Scrutton L.J. in the Court
of Appeal and has also prevailed with two of your Lordships, is
certainly attractive. The Bank of Portugal, so runs the argument,
is a bank of issue, that is to say, it can create and issue notes at its
discretion up to the maximum which the law of Portugal, embodied
in appropriate ordinances, permits. It costs the Bank nothing to
create and issue its notes beyond the cost of the paper and printing.
True, when the Bank issues one of its notes it incurs an obligation
to the holder of it. But inasmuch as the paper currency of
Portugal is not convertible, or. in other words, does not entitle the
holder to claim payment of its face value from the Bank in gold at
a fixed rate, the only obligation which the Bank incurs when it issues
a note is to give on demand another note in exchange for it. Thus
the Bank can always honour its obligation to the holders of its
notes at the trivial cost of printing new notes. A promissory note
which is perpetually renewable has theoretically no value because it
is never payable. The Bank has consequently only sacrificed some
stationery.

In my opinion this argument is fallacious. It overlooks
the cardinal fact that a note when issued by the Bank of
Portugal becomes by the mere fact of its issue legal tender for the
sum which it bears on its face. The issued note represents so much

[33] 4

purchasing power in terms of commodities. It can be used by the
holder of it to purchase at current prices any commodity, in the
market, including gold and securities. It can equally be used by
the Bank to purchase commodities, including gold and securities,
or to discharge debts due by it. It must be accepted by the Bank
in discharge of debts due to it. All this is quite irrespective of the
convertibility of the note. With all respect to the contrary view it
is in my opinion quite an irrelevant circumstance for the present
purpose that the holder of a Bank of Portugal note is not entitled
to demand for it from the Bank a fixed amount of gold. Gold after
all is only a medium of exchange. Its special importance as such
arises from its universal acceptability and the stability of its value.
A bank of issue which undertakes to pay its notes in gold under-
takes to give in exchange for them a commodity of universally
recognised value and therefore a paper currency backed by gold
possesses a high value in exchange; it is in effect as good as gold.
On the other hand a paper currency which the bank issuing it does
not undertake to pay in gold has necessarily a lower value in
exchange; its purchasing power is not measurable in terms of a
universally accepted standard, but depends on the credit of the
issuing bank. In the present case the low value in exchange of the
500 escudo note of the Bank of Portugal reflects its inconvertibility;
its purchasing power is correspondingly diminished. The Bank
gets less value for the notes which it issues than it would get if
they were convertible in gold.

In the course of the debate Mr. Simonds in answer to a question
from me admitted that if the notes of the Bank had been payable
in gold the liability of his clients would have been measurable in
terms of their face value. This admission in my view was really
inconsistent with his argument which, whether it be well founded
or not, seems to me to be unaffected by the convertibility or incon-
vertibility of the notes. Whether its notes are convertible or not a
bank of issue in issuing them incurs only the cost of paper and
printing; the difference consists in the purchasing power which
they represent according as they are the equivalent of so much gold,
i.e., of a universally acceptable medium of exchange, or only of so
much of the bank's credit, a particular medium of exchange whose
value may vary between being as good as gold or as worthless as
dross. If the notes of the Bank of Portugal had been convertible the
liability of Messrs. Waterlow & Sons would have been for the value
of convertible notes, i.e., for notes of a higher exchange value, instead
of for the value of inconvertible notes, i.e., for notes of a lower
exchange value.

Much stress was laid by Messrs. Waterlow & Sons on the fact
that in the Bank's own hands its notes were mere chattels possess-
ing only the value of the paper and printing and that if by a fire
in its premises its whole stock of notes were burnt it would lose no
more than their chattel value, whereas if the Bank's notes were
destroyed by fire while in the possession of a member of the public
a loss represented by their face value would be incurred. That is
true, but the argument disregards again the value of the note-
issuing power of the Bank which enables it to confer on the paper
which it issues the quality of legal tender, the quality of possessing
purchasing power to the amount indicated on its face. The Bank
only issues notes in exchange for value and the value of its notes in
turn reflects the value which it receives in exchange for them.
Herein lies the answer to the point advanced on behalf of Messrs.
Waterlow & Sons that inasmuch as the Bank issues the bulk of
its notes on the call of the Government on unremunerative terms
it cannot be said that the Bank if it had itself issued the spurious
notes would necessarily have received full value for them; they
might have been included in an unremunerative issue to the Govern-
ment. The answer, it seems to me, is that the circumstance that

5 [34]

a large number of its notes are issued to the Government in
exchange for Government paper on unremunerative terms has for
its result that the assets on which the paper currency of Portugal
is based are by so much the less valuable as a basis of credit and
that the currency has a correspondingly less value in exchange.
Messrs. Waterlow & Sons get the benefit in the depreciated value
of the escudos they have to pay.

It remains to notice an ingenious argument that the only effect
of the increase of the currency of Portugal by the introduction of
the spurious notes was to diminish the value of each unit of the
currency and so to increase correspondingly the value in terms of
that currency of all the assets in the country. Thus any loss
occasioned to the Bank by the introduction of the spurious notes
would be compensated by an equivalent appreciation of its assets.
This is said to be the result of what is known as the quantity
theory of money. I am not concerned to discuss the validity of
this theory. I should doubt if it is applicable in the case of a
surreptitious dose of excess notes and where, as here, the excess
notes as soon as their existence was known were at once withdrawn,
but in any case it is sufficient for the present purpose to point out
that there is no evidence of any depreciation of the currency having
occurred in consequence of the introduction of the spurious notes
and no evidence of the Bank having been compensated for issuing
gratuitously over two hundred thousand of its notes by an
equivalent appreciation of its assets. This argument, it may be
remarked, would appear to be equally applicable in the case of a con-
vertible currency.

On the whole matter accordingly I reach the conclusion that the
Bank being compelled to issue for nothing notes for which if it
had issued them in ordinary course it would have received value
corresponding to the purchasing power of the number of escudos
which they represented, has suffered loss to the extent of the face
value of these notes.

I now proceed to work out the practical result. The spurious
notes honoured by the Bank between 7th and 26th December
amounted to 207,706, which at 500 escudos each gives a total of
103,853,000 escudos, equivalent, at 96 escudos to the pound sterling,
being the agreed current rate of exchange at the time, to £1,081,802.
To this must be added £6,541, being the cost of the genuine notes
rendered useless by their withdrawal from circulation, bringing
out the total liability of Messrs. Waterlow & Sons at £1,088,343.
The Bank agreed that a claim of £2,381 which it had originally
made for the cost of the good notes given in exchange for the
spurious ones and which Wright J. took into account could not
receive effect if the Bank was awarded the value of the spurious
notes. For the sum of £1,088,343 the Bank would accordingly be
entitled to judgment, were it not for the fact that it has already
received from the liquidators of the Banco Angola e Metropole,
the organisation set up by the conspirators for the purpose of
utilising the spurious notes, a sum equivalent to £413,430 and have
also estimated that they will receive from this source a further sum
of £75,000, making in all £488,430. A question has been raised as to
the manner in which credit should be given for this sum. There
are various ways in which it may be treated. (1) It may simply
be deducted from the sum of £1,088,34.3 for which Messrs. Water-
low & Sons are liable, leaving £599,913 as the sum for which judg-
ment should be pronounced; (2) inasmuch as the Bank's total loss
(apart from the cost of printing notes) amounted to £1,092,281,
being the sterling equivalent of 209,718 spurious notes, and as the
£488,430 represents a partial recovery against this sum, a pro-
portion of the £488,430 in the ratio of 207,706 (being the number
of spurious notes in respect of which Messrs. Waterlow & Sons

[35] 6

have been found liable) to 209,718 (being the total number of
spurious notes honoured), or in other words 99.04 of the £488,430 or
£483,741 should be deducted from the sum of £1,088,343, leaving
£604,602 as the sum for which judgment should be pronounced; or
(3) the sum of £488,430 should be deducted from the Bank's total
loss of £1,098,822 (being the loss on 209,718 spurious notes plus the
cost of genuine notes rendered useless) leaving £610,392 and as
this sum is well within the total sum of £1,088,343 for which
Messrs. Waterlow & Sons are liable, judgment should be pronounced
for £610,392. Messrs. Waterlow & Sons contend for the first
method, Wright J. adopted the second, and the Bank contend for
the third, quoting in support The Morgengry and the Blackcock
[1900] P 1. The differences in result are relatively unimportant
in view of the magnitude of the sums involved and I have found
the question a troublesome one, but I have come to the conclusion
that the third method is the right one. Having recovered part of
their total loss from the perpetrators of the fraud and having
established liability for more than the balance of their total loss
against Messrs. Waterlow & Sons the Bank is in my view entitled
to avail themselves of Messrs. Waterlow & Sons' liability up to
the extent of the balance of their total loss and so to secure from
the combined sources complete indemnity.

In parting from the case I cannot refrain from observing that
the fact that a sum of nearly half a million pounds has been
recovered by the Bank from the conspirators gives occasion for a
comment on the leading contention of Messrs. Waterlow & Sons that
the Bank lost nothing by issuing its good notes in exchange for
spurious ones. The conspirators constituted themselves an illegal
bank of issue for the spurious notes which cost them nothing but
the cost of paper and printing, yet they seem to have made half a
million sterling, and probably much more, by the issue of these notes.
Why, it occurs to me to ask, should it be said that the Bank would
not equally have received value in return if it had issued a corre-
sponding number of genuine notes in ordinary course and that it
has been deprived of nothing by having had to issue them
gratuitously?

I am accordingly in favour of dismissing Messrs. Waterlow
& Sons' appeal, allowing the Bank's appeal and directing judgment
to be pronounced against Messrs. Waterlow & Sons for the sum of
£610.392.

(11824-44) Wt. 12O-27 14 5/32 P. St. G. 311