Pt Asuransi Tugu Pratama Indonesia Tbk v. Citibank N.A.

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FACV No. 11 of 2022

[2023] HKCFA 3

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 11 OF 2022 (CIVIL)

(ON APPEAL FROM CACV NO. 548 OF 2018)

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JUDGMENT

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Chief Justice Cheung:

1.I agree with the judgment of Lord Sumption NPJ.

Mr Justice Ribeiro PJ:

2.I agree with the judgment of Lord Sumption NPJ.

Mr Justice Fok PJ:

3.I agree with the judgment of Lord Sumption NPJ.

Mr Justice Lam PJ:

4.I agree with the judgment of Lord Sumption NPJ.

Lord Sumption NPJ:

Introduction

5.This is a dispute about limitation. In reality however, it is about one of the oldest and most litigated questions in commercial law, namely the rights of a corporate customer against a banker who has paid money out of its account on the dishonest instructions of an authorised signatory.

6.The Appellant, whom I shall call Tugu, was at the relevant time the captive insurer of PN Pertamina, an Indonesian state-owned oil and gas company. In December 1990, three officers of Tugu opened a current account in Tugu’s name in Hong Kong with Citicorp Investment Services Ltd, a subsidiary of the Respondent, Citibank N.A., whom I shall call the Bank. They were Mr Sonni Dwi Harsono, the President Director of Tugu with general powers to bind the company under its articles of association, Mr Rizaludin Sunjaya, the company’s Finance Director, and Mr Mohamad Hasan, a member of its Board of Commissioners. It is common ground that they had authority to open the account and to agree the terms of the mandate. In April 1994, as a result of a corporate reorganisation of the Citibank group, the account was transferred to the Bank’s Hong Kong branch, where it remained throughout the relevant period.

7.The bank mandate provided that any two of the three officers who had opened the account were authorised to give instructions relating to it. The account-opening documentation directed that all documents and correspondence should be sent not to Tugu but to a “Hold All Mail” box number at the Bank’s branch in Jakarta. Between 23 June 1994 and 30 July 1998, substantial sums were received into the account from various operating subsidiaries of Tugu. They generally remained there for fairly brief periods before being paid out to one or more of Mr Hasan, Mr Harsono, Mr Sunjaya and a fourth officer called Anton Ponto. A total of 26 transfers worth US$51.64 million altogether were paid out this way, all of which were purportedly authorised by payment instructions signed by Mr Harsono and Mr Sunjaya. The Judge found that the sole purpose for which the account was used was to serve as a “temporary repository of funds” en route from the operating subsidiaries into the pockets of the four individuals. Apart from occasional transfers to short-term interest-bearing time deposits, there were no other significant transactions. The final payment instruction, dated 16 July 1998, directed the Bank to “transfer all funds in the account” to a Citibank account in Jakarta in the name of Mr Harsono and Mr Sunjaya and then to “close the account after the balance is nil”. The Bank duly executed the transfer and on 30 July 1998 purported to close the account.

8.On 6 October 2006, Tugu wrote to the Bank alleging that all 26 transfers had been dishonestly authorised and demanding payment of their aggregate value. On 2 February 2007 these proceedings were begun in furtherance of that demand. The basis of the claim was that the Bank ought to have known that the transfers were out of the ordinary course of business and were not for its benefit but for that of the transferees personally. As such, they could not have been within their authority, either actual or ostensible. It was alleged that the instruction of 16 July 1998 to close the account was also unauthorised. Tugu claimed that the debit entries resulting from the unauthorised transfer instructions and the unauthorised closure instruction of 16 July 1998 were of no effect, and that accordingly the account remained in existence and fell to be “reconstituted” by reversing the disputed debit entries. This was accordingly a claim in debt. Further or alternatively, Tugu claimed the same amount as damages for breach of a duty of care owed in contract and/or tort not to give effect to the payment instructions in circumstances where the Bank knew of facts which would lead a reasonable and honest banker to consider that “there was a serious or real possibility that [Tugu] might be being defrauded… by the giving of that payment instruction.” There was an alternative plea that the Bank was reckless and turned a blind eye to the improper character of the transactions by acting on the instructions without making inquiries or informing at least one of Tugu’s independent directors.

9.On the face of it, the payment of such large sums from a corporate account to its signatories and officers personally is unlikely to have been for the benefit of the company. The Judge, Anthony Chan J, found that all 26 transfers were fraudulent on the part of the signatories, and this is no longer disputed. He acquitted the Bank of dishonesty, recklessness or wilful breach of duty. But he held that a reasonable and prudent banker would have been put on inquiry by the time of the third transfer, when a pattern had emerged indicating the improper character of the way that the account was being operated. The Judge believed it to be common ground that the Bank made no inquiries. He held that this was a breach of the Bank’s duty. It followed that Tugu was entitled to have the account reconstituted by reversing all but the first two debits. However, he went on to hold that for limitation purposes, Tugu’s cause of action arose upon the purported closure of the account on 30 July 1998, because the closure instruction was authorised. The contractual relationship of banker and customer therefore terminated at that point notwithstanding the absence of a demand until 2006. It followed, on this view, that the claim was statute-barred by the time that these proceedings were commenced.

10.The Court of Appeal dismissed the appeal. The leading judgment was delivered by Kwan VP, with whom Barma JA and Au JA agreed. The conclusions of the Court of Appeal for the most part mirrored those of the Judge. They upheld his finding that the Bank had been put on inquiry from the time of the third payment instruction. They found that, contrary to the Judge’s belief, it had not been common ground that no inquiries had been made, but that in fact the necessary inquiries were not made. This was because the only record of any such inquiries suggested that the Bank had contacted the signatories only. They should, in the Court of Appeal’s view, have contacted directors independent of the operators and beneficiaries of the fraud. However, the Court of Appeal went on to uphold the Judge’s conclusion that the action was statute-barred, on slightly different grounds. They held that the closure of the account was unauthorised and repudiatory but that it was nevertheless effective to bring the relationship of banker and customer to an end and operated as a waiver of the need for a demand. It was irrelevant that the repudiation was not accepted by the customer. It followed that the cause of action for the wrongful payments accrued in 1998.

11.In both courts below, the Bank advanced a case of contributory negligence. It did not arise because both courts held that the claim failed in its entirety for limitation. Both courts, however, considered the issue and held that but for limitation, contributory negligence would have lain. The Judge assessed the contribution of Tugu’s fault at 50 per cent, and the Court of Appeal upheld him on that point.

The issues on the appeal

12.Leave to appeal was granted by the Court of Appeal, limited to two issues, which they formulated as follows:

“(1) In the context of a contract between banker and customer (debtor/creditor), if the banker invalidly terminates the contract, thereby evincing an intention no longer to be bound by the banker/customer relationship, whether the invalid termination (unless and until accepted by the customer as bringing the contract to an end) is of any relevance in identifying (for the purposes of the Limitation Ordinance) the date of accrual of the customer’s cause of action to recover back the amount which ought to be standing to his credit in his account, or any cause of action for damages for breach of the banker’s Quincecare duty.

(2) Whether a customer’s claim to recover the balance which ought to be standing to his credit in his account with the banker, which account has been emptied by unauthorised payments, ought properly to sound in debt (to which contributory negligence is not a defence).”

The first issue begs a number of questions relating to the signatories’ ostensible authority and the nature of the Bank’s duties. In practice the parties’ submissions ranged more widely to cover them. I think that they were right to do so, and that this court should decide these questions rather than resolve the appeal on what may be a false legal premise. I propose therefore to rephrase the first issue in more general terms, as follows: does a cause of action for sums debited without authority to the account arise upon the closure of the account, without the need for a demand?

Authority

13.There are two juridical sources for a bank’s duties in making payments out of an account. The first goes without saying. A banker’s duty is to make such payments only with the authority of the customer. In principle, that means in accordance with the customer’s mandate. But the duty to pay in accordance with the mandate is not absolute. A mandatory acts as an agent of the company with authority to act in its interest. Mr Harsono and Mr Sunjaya could not have had any actual authority, as between themselves and Tugu, to direct the payment of the company’s funds to themselves and their colleagues personally. It is, however, well established that a bank (like any third party dealing with an agent) may be able to rely on the agent’s apparent (or ostensible) authority by virtue of his position as a signatory and/or officer of the company, which will bind the company as regards a third party who has no notice of the want of actual authority. The second juridical source is a bank’s duty as the customer’s agent. “The relation between a banker and customer is the ordinary relation of debtor and creditor, with a superadded obligation arising out of the custom of bankers to honour the customer’s drafts”: Foley v Hill (1848) 2 HLC 28. In transferring funds to another party (usually by cheque or draft, in the older cases), a banker acts as the customer’s agent. This is the “superadded obligation”. In performing it, he owes all the ordinary duties of an agent including the duty to exercise reasonable skill and care: Selangor United Rubber Estates Ltd v Cradock (No. 3) [1968] 1 WLR 1555, at p. 1608; Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, at p. 375. That duty sounds in both contract and tort.

14.The existence of two juridically distinct sources for a bank’s duty has tempted practitioners to engage in ingenious arguments based on the differences between them. There are differences, which may affect, for example, remedies, limitation and contributory negligence. But the standard of duty is the same under either head, because the duty of care is a duty in the performance of the mandate. As Ungoed-Thomas J observed in Selangor, at p. 1609:

“[a]s between the company and the bank, the mandate, in my view, operates within the normal contractual relationships of customer and banker and does not exclude them. These relationships include the normal obligation of using reasonable skill and care… So the duty of skill and care applies to interpreting, ascertaining and acting in accordance with the instructions of a customer.”

The law cannot coherently treat compliance with an authorised instruction as a breach of duty; or treat a transfer made in breach of duty as authorised.

15.The Bank has not challenged before us the finding of both courts below that by the time of the third payment instruction the Bank knew enough to prevent it from relying on the ostensible authority of the signatories to direct the transfers. The Bank’s case on authority is directed to the closure instruction given on 16 July 1998. They say (i) that although the payments out of the account were unauthorised, its closure in 1998 was authorised and effectually put an end to the relationship of banker and customer; (ii) that the debt became immediately payable without demand upon that relationship coming to an end; (iii) that once the relationship of banker and customer was at an end, the right to claim the balance of the account as a debt was extinguished, and replaced by a right to claim damages for breach of contract accruing not later than 1998; and (iv) that either or both of points (ii) and (iii) meant that the cause of action accrued more than six years before this action was brought.

16.The critical question, whether one looks at a bank’s duty of care or at the law relating to ostensible authority, is what constitutes sufficient notice of a want of actual authority, so as to require a bank to make inquiries before paying out in accordance with its mandate. The basic rule is stated in Bowstead & Reynolds on Agency, 22nd ed. (2021), at article 73:

“No act done by an agent in excess of actual authority is binding on the principal with respect to persons having notice that in doing the act the agent may be exceeding the agent’s authority.”

The editors comment, at para. 8-048, as follows:

“The problem is to know what constitutes notice, and when there is a duty to inquire. It is often said that neither constructive nor presumed notice apply in commercial transactions. This certainly excludes the full doctrine of constructive notice of equitable interests in land, whereby a person is expected to take the initiative and make inquiries, being deemed to have notice of property interests which would have come to that person’s knowledge if such inquiries and inspections had been made as ought reasonably to have been made. But there can be no doubt that in many situations where it is relevant to know whether one person has knowledge of facts, including those raising the doctrine of apparent authority, the court may infer from the circumstances that the person concerned must have known of the facts in question or at least ought to have been suspicious to the extent that further inquiries would have been appropriate in the context.

It seems that the proper approach in commercial cases is to apply the objective interpretation which one person is entitled to put on another’s words and conduct in the light of the facts known to the former.

…

Many things might be sufficient to put an outsider on inquiry as to an agent’s authority. The third party’s knowledge that the agent has a substantial conflict of interest in respect of the transaction is one of the more common examples, but a plain lack of benefit for the principal or commercial purpose on the face of the transaction, and unusual aspects of the transaction are another.”

This statement of principle reflects long-standing authority. Both the general proposition and the editors’ comments in similar terms in the previous edition were endorsed by the Privy Council, after reviewing the authorities, in East Asia Co Ltd v PT Satria Tirtatama Energindo [2020] 2 All ER 294, at [70]-[94].

17.The phrase “on inquiry” is traditional, but it is apt to mislead unless one appreciates what it involves in a commercial context. It is not the same as constructive notice. There is no general obligation spontaneously to inquire into an agent’s authority and no rule that fixes the third party with notice of what might be discovered upon such an inquiry. The starting point is what is actually known to the third party without inquiry (or would actually be known to him if he appreciated the meaning of the information in his hands). The question is whether the information which he actually has calls for inquiry. If, even without inquiry, the transaction is not apparently improper, then there is no justification for requiring the third party to make inquiries. But if there are features of the transaction apparent to a bank that indicate wrongdoing unless there is some special explanation, then an explanation must be sought before it can be assumed that all is well. In other words, if a bank actually knows of facts which to their face indicate a want of actual authority, it is not entitled to proceed regardless without inquiry.

18.The leading authority for this proposition is the classic statement of a bank’s duty of skill and care in executing his customer’s instructions by Steyn J in Quincecare, at p. 376:

“Given that the bank owes a legal duty to exercise reasonable care in and about executing a customer's order to transfer money, it is nevertheless a duty which must generally speaking be subordinate to the bank's other conflicting contractual duties. Ex hypothesi one is considering a case where the bank received a valid and proper order which it is prima facie bound to execute promptly on pain of incurring liability for consequential loss to the customer. How are these conflicting duties to be reconciled in a case where the customer suffers loss because it is subsequently established that the order to transfer money was an act of misappropriation of money by the director or officer? If the bank executes the order knowing it to be dishonestly given, shutting its eyes to the obvious fact of the dishonesty, or acting recklessly in failing to make such inquiries as an honest and reasonable man would make, no problem arises: the bank will plainly be liable. But in real life such a stark situation seldom arises. The critical question is: what lesser state of knowledge on the part of the bank will oblige the bank to make inquiries as to the legitimacy of the order? In judging where the line is to be drawn there are countervailing policy considerations. The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers. In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is 'put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company… And, the external standard of the likely perception of an ordinary prudent banker is the governing one” (emphasis added).

19.In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, the Court of Appeal applied the same test for determining the circumstances in which a bank is put on inquiry. May LJ, at p. 1356, accepted a submission of counsel that the duty to inquire “could only arise when the transaction on its face was dishonest, but could have an honest explanation if appropriate inquiry was made”. Endorsing the observations of Steyn J on this point, he went on to say:

“Having in mind the vast numbers of cheques which are presented for payment every day in this country, whether over a bank counter or through the clearing bank, it is, in my opinion, only when the circumstances are such that any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her superior, and when any reasonable superior would hesitate to authorise payment without inquiry, that a cheque should not be paid immediately on presentation and such inquiry made. Further, it would, I think, be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customers' cheques to him before they are paid.”

In Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2020] AC 1189, at [1], Baroness Hale, also endorsing Steyn J’s remarks, said that a bank:

“should refrain from executing an order if and for so long as it was put on inquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds”.

20.A certain amount of confusion has arisen from the fact that in East Asia, at [83]-[92], the Privy Council, following the editors of Bowstead & Reynolds, considered that the “orthodox view” had been challenged by this court in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No. 2) (2010) 13 HKCFAR 479, where the leading judgment was given by Lord Neuberger NPJ, with whom the rest of the court agreed. The Privy Council, at [75], stated the test as being whether the third party could “reasonably” rely on the apparent authority of the agent given what it knew. The challenge was said to consist in Lord Neuberger’s preference for the word “irrationality”. I respectfully suggest that the supposed conflict stems from a misunderstanding of the reasoning in Akai Holdings. Although the two judgments offer different analyses of some of the authorities, there is in my view no difference between the law stated by this court in Akai Holdings and by the Privy Council in East Asia. It is necessary to distinguish between (i) the general principle governing ostensible authority and a bank’s duty of care, and (ii) its application to a particular case. The orthodox view has always been that what a third party is entitled to rely on may differ according to the commercial context and the exigencies of business. The facts in Akai Holdings were that the bank had lent a large sum to company S, over which a Mr Ting had management control. Company S defaulted on the loan. Mr Ting purportedly authorised what was called the “Switch Transaction”, by which liability for the loan was transferred to an unrelated company, C, of which he was the executive chairman. It was conceded that the transaction was beyond Mr Ting’s actual authority. No one doubted that if the bank was dishonest, or if (which amounted to the same thing) it was reckless or turned a blind eye to the apparent impropriety of the transaction, it could not rely on Mr Ting’s ostensible authority. But both courts below had rejected the allegation against the bank’s integrity and this court declined to interfere with their concurrent findings on that point. The question was therefore what lesser degree of knowledge would suffice to defeat ostensible authority. The alternatives were “irrationality” and “unreasonableness”. Lord Neuberger preferred to call it a test of irrationality, although he regarded both as objective tests and doubted whether there would in practice be much difference between them: see [50]. It is, however, clear that his analysis was not intended to qualify the general principle, as expressed in the “orthodox view”. It was directed only to its application in a commercial context such as banking. In his view a test of irrationality better reflected the exigencies of business which would normally be decisive in a commercial transaction. The bank’s belief in Mr Ting’s ostensible authority was “irrational” because the Switch Transaction on its face involved the gratuitous assumption by company C of a large liability to its obvious disadvantage, but to the advantage of company S and the bank itself. Some variant of this situation is normally the factual background when a bank is held to have no authority to act on an authorised signatory’s direction. To say that it must be “irrational” and not just “unreasonable” to proceed without inquiry simply served to emphasise that inquiry was not called for by a general duty to inquire into the customer’s transactions. It was necessitated by remarkable facts actually known to the bank which, unless explained, pointed to impropriety on the part of the agent. The bank must be shown to have proceeded with the transfer notwithstanding that without further inquiry it had no reason to regard it as a proper use of the signatory’s authority under the mandate.

21.Turning to the facts of the present case, the closure instruction differed in two respects from the transfer instructions. First, it was not an instruction which the Bank purported to execute as Tugu’s agent. It was a principal to principal transaction whose validity was a pure question of authority. Secondly, if one ignores the 26 unauthorised transfers, the closure of the account was not in itself detrimental to the customer. However, in my judgment the closure instruction was no more within the apparent authority of Mr Harsono and Mr Sunjaya than the payment instructions, because the transfers cannot be separated from the closure in the neat fashion proposed by the Bank. The Judge found that the account had been improperly used throughout as a “temporary repository of funds” en route to the pockets of the officers. That much was apparent from the pattern which had emerged by the time of the third transfer. It was therefore open to the Court of Appeal to find that on the face of the information in the Bank’s hands by 1998 the whole operation of the account was unauthorised, including its closure when it had served its purpose. But there is also a more fundamental reason. As I shall explain below, the impropriety of the transfers meant that the account could not properly be closed without an accounting exercise to restore the balance to what it should have been.

22.There was some documentary evidence that the Bank discussed the commercial rationale for the closure with the signatories, but the Court of Appeal was in my view entitled to take the view that these exchanges were an inadequate response to the problem apparent from the way that the account had been used. The discussion with the signatories does not appear to have related to the propriety of using the account as a conduit for payments to the four beneficiaries personally, and it was made with those involved in the fraud. In the circumstances, they were not persons who could be expected to give an answer in the interest of Tugu rather than themselves.

Limitation

23.It is well settled that a customer has no proprietary interest in funds deposited with a banker. The obligation of a banker is to pay to or to the order of the customer on the latter’s demand. It follows that a cause of action in debt arises when that demand is made, and not before: N. Joachimson (a firm) v Swiss Bank Corporation [1921] 3 KB 110, at p. 115. This means that the running of time for limitation purposes may be indefinitely deferred by the customer, and that an account may be dormant without activity for many years without affecting the customer’s right eventually to demand the balance. No doubt, as Atkin LJ observed in Joachimson, at p. 131, this may be inconvenient to banks, but it is a fundamental incident of their business.

24.In theory, a cause of action may arise for breach of a bank’s duty of care in the making of transfers independently of any demand. The customer could, for example, sue for a declaration without a demand for payment. But the coexistence of a right of action for breach of contract makes no practical difference to the financial position. If a bank has debited an account without authority, damages will be nominal because an unauthorised debit is a nullity. The customer is entitled to disregard it and require the account to be reconstituted as it should have been. In that case, what is reconstituted is simply the bank’s records. It is not the bank’s liability, which has always been for the balance undiminished by the unauthorised debits. The customer’s only effective financial remedy is accordingly in debt for the reconstituted balance of the account, and that debt is likewise payable on demand: Limpgrange Limited v Bank of Credit and Commerce International SA [1986] FLR 36, at p. 47-48; National Bank of Commerce v National Westminster Bank [1990] 2 Lloyd’s Rep. 514, at p. 517; Crantrave Ltd (in liquidation) v Lloyds Bank plc [2000] QB 917, at p. 925, per May LJ; Sagicor Bank Jamaica Ltd v YP Seaton [2022] UKPC 48, at [19]-[21].

25.The Bank has sought on this appeal to present Tugu’s claim as a claim for damages for breach of duty. It has characterised the claim for the debt as a “fiction”. This is tactically understandable, since a claim for damages for breach of duty would be statute-barred, as Mr Sussex SC for Tugu concedes. But I do not accept the Bank’s characterisation of the available claims. There is nothing artificial or fictional about Tugu’s claim for a debt corresponding to the reconstituted balance of the account. It is Tugu’s primary claim and the only one which has ever been capable of yielding a financial remedy.

26.The Bank’s argument is that this case is different because the relationship of banker and customer came to an end when the account was closed in 1998. No demand pursuant to that relationship, it argues, could thereafter be made. So the reconstituted balance became payable upon closure or not at all. This submission is based on dicta of Atkin LJ in Joachimson, at p. 132, and Wynn-Parry J in Re Russian Commercial and Industrial Bank [1955] 1 Ch. 148, at pp. 156-157. Atkin LJ’s dictum was to the effect that the necessity of a demand would “no doubt” be waived if the relationship of banker and customer was terminated by the bank’s repudiation. Re Russian Commercial and Industrial Bank was a claim to prove in the winding up in England of a Russian Bank which had been dissolved in Russia before any demand had been made. Wynn-Parry J held that for the purpose of distribution of the assets in a winding up, the dissolution had to be ignored. But, building on the dictum of Atkin LJ, he observed that, apart from the winding up rules, the debt would contractually have become payable on dissolution. This was because the necessity for a demand was an incident of the banking relationship which subsisted “only so long as it lasts”. The relationship could not subsist once the legal personality of the bank had been extinguished. These statements are authority for the proposition that a balance on a bank account is payable by the bank on the termination of the banking relationship with or without a demand. That principle, however, has no application to the present case because the closure of the account did not discharge the debt represented by the reconstituted balance, and for as long as that debt remained outstanding the relationship of banker and customer subsisted. There are two reasons.

27.First, the closure was, as the Court of Appeal held, unauthorised. For that reason, it was no doubt a repudiation of the banking relationship. Tugu did not accept the repudiation as bringing the contract to an end, but the Bank argues that this is one of those exceptional cases where the repudiation brings the contract to an end unilaterally, because the innocent party “has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages”: see White and Carter (Councils) v McGregor [1962] AC 413, at p. 431. The exceptional cases are cases like White and Carter itself or MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] 2 Lloyd’s Rep 494 in which the innocent party is artificially increasing the contract-breaker’s liabilities by insisting on the pointless continuance of the contract. In this case, on the other hand, the natural remedy is inherent in the nature of the contract. It is payment of the undischarged subsisting debt which was originally created when deposits were credited to the account. Because the unauthorised debits were nullities, the balance on the account was unaffected by them in law and was never discharged. Therefore damages could not be a reasonable alternative, because no loss has been suffered which could give rise to them. In those circumstances, the continuance of the contract was not pointless. It entitled Tugu to claim the undiminished balance on demand without limit of time. There is no obvious reason why it should be deprived of that right for the benefit of the Bank and limited to its provable loss, on account of the latter’s wrongful conduct.

28.The second reason applies whether the account was closed with the customer’s authority or not. A banking contract may be terminated by a bank at any time on notice. But there is no principle of law which entitles a bank unilaterally to abrogate its outstanding liabilities or to discharge a debt without paying it. To effectually terminate the relationship, it must pay (or at least tender) the outstanding reconstituted balance. The Bank has not done that. In response to the “drain and close” instruction of 16 July 1998, it simply made a final unauthorised transfer to the fraudulent officers. It should have done nothing without a properly authorised instruction, and then (subject to that instruction) paid the full credit balance undiminished by the prior unauthorised transfers out of the account. The reconstituted debt was created by the successive deposits to the credit of the account while the contract was on any view subsisting. On the footing that the debt has not been discharged, it must still exist on the terms on which those deposits were made. It follows that the debt, undiminished by the unauthorised withdrawals, still subsisted in 2006 when it was demanded, and time did not begin to run for limitation purposes until then. These proceedings having been begun in the following year are not statute-barred.

Contributory negligence

29.On the footing that the claim is not statute-barred, the question arises whether it can be abated on account of Tugu’s contributory negligence. Section 21 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) provides:

“(1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage.

…

(10) …

‘fault’ means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this section, give rise to the defence of contributory negligence.”

30.In Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488, at p. 508, Hobhouse J, construing the identical provisions of the English Law Reform (Contributory Negligence) Act 1945, distinguished three categories of claim for damages for breach of contract:

“(1) Where the defendant’s liability arises from some contractual provision which does not depend on negligence on the part of the defendant.

(2) Where the defendant’s liability arises from a contractual obligation which is expressed in terms of taking care (or its equivalent) but does not correspond to a common law duty to take care which would exist in the given case independently of contract.

(3) Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract.”

He held that contributory negligence lay in category (3).

31.A case of contributory negligence could no doubt be advanced as a partial defence to a claim by Tugu for damages for breach of the Bank’s duty of care in the making of payments to third parties. That would be a category (3) case. But the claim on which Tugu is entitled to succeed is a claim in debt. A claim in debt is not a claim in respect of “damage” for the purpose of section 21(1) of the Ordinance. Moreover, even if it were, it would be a category (1) case, since a liability for a debt is absolute and not dependent on proof of negligence. The Bank’s case is that it is to be regarded as a claim based on negligence since the debt arises only because of the Bank’s failure to make the inquiries that a reasonable and prudent banker would have made. This appears to me to be unarguable. In the first place, it does not make a claim for a debt into a claim for “damage”. Secondly, in claiming the debt Tugu is not claiming any relief on account of the “fault” of the Bank in failing to make relevant inquiries. The debt arises from the deposits made into the account from Tugu’s operating subsidiaries. The Bank’s failure to make relevant inquiries is merely the reason why the debt was never effectually discharged.

Disposal

32.It follows that the appeal must be allowed and that Tugu is entitled to judgment for the aggregate amount of the unauthorised debits apart from the first two.

33.Interest is claimed from the date of demand, i.e. 6 October 2006. Mr Jat SC, for the Bank, tentatively suggested at the end of his argument that in the exercise of the court’s discretion interest should not be awarded for the whole of that period because of Tugu’s delays in investigating the operation of the account and bringing this claim. But since the Bank has had the use of the money throughout and there was no relevant delay after 6 October 2006, that suggestion falls away. Interest should be awarded at prime plus 1 per cent from that date.

34.The parties are invited to agree the exact figure for which judgment should be given.

Chief Justice Cheung:

35.Accordingly, the court unanimously allows the appeal and orders that judgment be entered for the Appellant for the aggregate amount of the unauthorised debits apart from the first two, the exact figure of which is to be agreed by the parties with liberty to apply, together with interest thereon at the prime rate plus 1% from 6 October 2006 until judgment and thereafter at the judgment rate. The court also orders, on a nisi basis, that the costs of the action, the appeal before the Court of Appeal and the appeal before this court be paid by the Respondent to the Appellant, to be taxed if not agreed, with a certificate for two counsel. The court further directs that the costs order nisi shall become absolute if no application is made for variation within 14 days from the date hereof; any such application shall be dealt with on paper in accordance with the directions that the Registrar will give in such event.

Mr Charles Sussex SC and Mr Tom Ng, instructed by Holman Fenwick Willan, for the Appellant (Plaintiff)

Mr Jat Sew-tong SC and Mr John Hui, instructed by Clifford Chance, for the Respondent (Defendant)