Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd and Others

HCA001488C/1978

Banking - Forged cheques - Wrongful debiting of a customer's current account - Whether the customer is vicariously liable to the bank for the forgeries of its servant - Whether the customer owed the bank a duty of care - Whether the banks' rules were contractual - Construction of the banks' rules - Account stated - Conclusive evidence clause - Verification agreement-Estoppel Evidence - Standard of proof in civil proceedings when allegations of criminal conduct are made.

A textile mill employed a dishonest accounts clerk who stole HK$ 7,000,000 from its bank accounts over a period of 5 years by obtaining the Managing Director's signatures to cheques by deception and by forging the Managing Director's signature. The mill's internal accounting system was inadequate to prevent or discover the frauds, chiefly because the task of reconciling the monthly bank statements was left to the dishonest clerk and there was no independent check of the reconciliations until at the end in May 1978 the frauds were revealed. At no time ever the 5-year period did the mill ever protest or question any of the monthly bank statements and in the case of one of its bank accounts sent regular confirmations of the monthly statements. In an action by the mill against the clerk for damages and against the three paying banks for declarations that they were not entitled to debit its accounts with them with the amounts of the forged cheques, it was held that:-

BETWEEN

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Coram: Hon. Mantell, J.

Date: 12 July 1983

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JUDGMENT

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1. The plaintiff is a textile manufacturer. The first three defendants are banks. The 4th defendant was employed by the plaintiff as an accounts clerk, and the 5th defendant is the 4th defendant's wife. It is alleged that the 4th defendant stole large sums of money from the plaintiff's bank accounts with the Dah Sing Bank and with each of the first three defendants by fraud or forgery and that the 5th defendants has received some of the proceeds. The plaintiff's claim against the 5th defendant has been compromised. The claim against the 4th defendant is for damages for fraud and conversion. The claims against the 1st, 2nd and 3rd defendants are for declarations that they are not  entitled to debit the plaintiff's accounts with the amcounts of the forged cheques.

2. Since there are allegations of criminal conduct Mr. Diamond submits that the plaintiff must prove them to the same standard as would be necessary in a criminal court. He relies upon a decision of the Privy Council, ⁽¹⁾ not on appeal from Hong Kong, which is certainly authority for the proposition and which was recently followed by the High Court in Hong Kong, ⁽²⁾ but in the latter case the learned judge was not referred to the decision in Reg. v. Home Secretary Ex-parte Khawaja.⁽³⁾ In khawaja, the House of Lords approved the approach of the English Court of Appeal in Hornal, v. Newberger Products limited ⁽⁴⁾ and Bater v. Bater ⁽⁵⁾ which favoured a flexible application of the civil standard. Lord Scarman said :

He quoted the words of Morris L.J. in Hornal's case.

"No real mischief results from an acceptance of the fact that there is some difference of approach in civil actions......the very elements of gravity become a part of the whole range of circumstances which have to be weighed in the scale when deciding as to the balance of probabilities."

I have sought to apply the civil standard as defined in khawaja's case bearing in mind at all times the aphorism of Lord Denning in Blyth v. Blyth. ⁽⁶⁾

"In proportion as the offence is grave, so ought the proof to be clear."

Applying that standard I find as follows.

3. The plaintiff is a medium sized, reasonably successful textile company which has been in business in Hong Kong since 1957. It comprises a number of divisions each of which is autonomous to a degree. The Managing Director is Mr. Chen. He started the company in Hong Kong and before 1957, controlled a similar business in Shanghai. At different times, the plaintiff has held a number of bank accounts. In November 1962, the plaintiff opened a bank account with the 1st defendant. That account was allocated to the Spinning and Weaving Division. The request to open a current account is dated 8th November 1962 and was signed by Mr. Chen. The request begins with these words:

"We request you to open a current account for and in the name of Tai Hing Cotton Mill Limited, a company incorporated in Hong Kong, having its registered office at 908/909 Yu To Sang Building, Hong Kong, subject to your Rules and Regulations for the conduct of such account."

4. Mr. Chen admits having seen a copy of the Rules and Regulations at the time of making the request to open a current account. Some alterations were made later but rule 13 of the rules seen by Mr. Chen reads:

No confirmation of any material bank statement was ever sent by the plaintiff to the 1st defendant. The 1st defendant was authorised to pay cheques drawn on behalf of the company if singed by Mr. Chen or by any two of four nominated signatories. An account was opened with the 2nd defendant in November 1961. By letter of 17th November 1961, Mr. Chen agreed on behalf of the plaintiff to observe the provisions of an agreement which is to be found on the reverse of the proforma letter and to conform to the bank's notice in the cheque book. By that letter Mr. Chen further undertook to hold the bank free from any loss resulting from the plaintiff's failure to abide by such provisions or notice. Clause 10 of the "agreement" provides:

"The Bank's statement of my/our current account will be confirmed by me/us without delay. In the case of absence of such confirmation within a fortnight, the Bank may take the said statement as approved by me/us."

Again no material bank statement ever was confirmed. Again cheques could be signed by Mr. Chen alone or by two authorised signatories. The plaintiff's account with the 3rd defendant was opened in September 1957. The request for the account to be opened was signed, as in the other cases, by Mr. Chen and there was the same arrangement for signing cheques as with the 1st and 2nd defendants. By the request, the plaintiff agreed "to comply with your bank's Rules and procedures in force from time to time governing the conduct of such account". There is an issue as to whether or not Mr. Chen had sight of the 3rd defendant's then current. Rules at the time of making the request. He says he did not. Impressive witness though Mr. Chen was, I take his evidence to mean that after this interval of time, he does not remember seeing a copy of the Rules. Mr. Lee, an official of the Chekiang First Bank at the material time, whose evidence was in some respects less than satisfactory, told me that it was the invariable practice for the bank to send or hand a copy or its Rules for current accounts to every customer at the time that the proforma request was sent or handed over. Mr. Chen is meticulous. I do not think that he would have signed the reouest without seeing the Rules to which it referred. I find that he did have a sight of the Rules at the time when he opened the account. I recite rule 7:

"A monthly statement for each account will be sent by the Bank to the depositor by post or messenger and the balance shown therein may be deemed to be correct by the Bank if the depositor does not notify the Bank in writing of any error therein within ten days after the sending of such statement. Except for the month of June and December, no monthly statement for an account will be sent if there is no entry passed through it in the month.'

5. From the account being opened in 1957 to March 1978 the plaintiff did confirm the accuracy of each monthly statement by returning the confirmation slip signed by two authorised cheque signatories. I so find even though one such confirmation slip for January 1978 has not been produced. In addition each year before audit the plaintiff asked the bank to confirm its current account balance. Mr. Lee told me that from time to time he had compared suspect signatures with signatures on cheques in an earlier month which had been confirmed. There is no evidence that any of those suspect signatures are to be found amongst, the forgeries and in any event I did not believe him. The allegation that the 3rd defendant relied upon the confirmation in that way is not pleaded. The evidence only came out in cross-examination, and I simply do not accept that given the suspicion the bank would have gone through that procedure rather than telephone the plaintiff.

6. At one time, there were five manufacturing divisions in the plaintiff company. Except for the Knitting Division it was Mr. Chen's practice to allocate to each of then the use of one or more than one of its current banking accounts. Thus, the Garment Division used the bank accounts with the Dah Sing Bank and the 3rd defendant. The Texturizing Division used the accounts at the Bank of Tokyo and at the 2nd defendant. Along with other accounts, the Spinning and Weaving Division and the Dyeing and Finishing Division had the use of the current account at the 1st defendant's bank.

7. I have mentioned that the plaintiff company was reasonably successful. In fact, it made a trading profit in all but one year between 1957 and 1978. In those years, it has been shown to have had a considerable turn over. The profits would have been greater but for the fact that towards the and of 1972, it took into employment the 4th defendant, a young accounts clerk named Leung. He was, as I find, and as he has admitted to the police quite dishonest. He was given responsibility for the books of account of the Garment Division and the Texturizing Division. Before long, he was stealing. He opened bank accounts in names similar to those of real suppliers. Leung persuaded Mr. Chen to sign cheques by showing him forged documents which appeared to support the transaction. Sometimes, Mr. Chen would sign cheques on which the words "or bearer" had not been cancelled. Then, Leung would simply endorse the cheque in his own name and receive payment. In this way, Leung stole HK$317,068.04 from the plaintiff's Dah Sing Bank account between 4th December 1972 and 31st January 1974. He used the same method to steal from the plaintiff's 'current account with the 2nd and 3rd defendants. The extent to which I find he did so will depend upon other findings of fact not yet reached. The method worked well enough, but Leung did not rely upon it entirely. Perhaps because he dared not come too often to Mr. Chen with cheques drawn in favour of the same supplier, he decided of forge Mr. Chen's signature and so by-pass Mr Chen altogether. Leung was an adept forger. He passed forged cheques through the plaintiff's account with the Bank of Tokyo and the Chekiang First Bank and, when his superior retired through ill-health at the beginning of November 1977 and he became responsible for the plaintiff's account with the Liu Chong Hing Bank, he drew forged cheques on that account for substantial sums of money. He was eventually exposed in May 1978 when the new chief accountant carried out a reconciliation of the plaintiff's March monthly statement for its account with the 1st defendant.

8. As I find, there is no question but that Leung obtained the total amount pleaded in the Statement of Claim by one such dishonest means or the other. But the plaintiff's claim against the banks does not get off the ground unless in relation to any particular cheque it can be shown to have been forged. It is important, thereforre, for the plaintiff to be able to distinguish between cheques bearing signatures which were obtained by deception and cheques bearing forged signatures. So, in the first place, I have to ask myself whether or not the plaintiff has proved against each of the first three defendants that all or some of the cheques alleged to have been forged were forged. There is no difficulty with regard to the 1st defendant. Forgery was an issue on the pleadings but after cross-examination of Mr. Chen, Mr Morritt for the 1st defendant conceded that all 54 cheques, material to the case against him, had been forged by Leung. Those cheques are set out in Schedule A of the Particulars under paragraph 4 of the Statement of Claim and were drawn on the plaintiff's account with the Liu Chong Hing Bank between 5th November 1977 and 31st March 1978. They have a face value of HK$3,082.214.30. The 2nd defendant put forgery in issue in respect of all 110 cheques set out in Schedules B and G to the Particulars under paragraph 4 of the Statement of Claim. The plaintiff does not pursue its claim in relation to 6 cheques but alleges that each of the remaining 104 was forged; that they covered the period 30th January 1975 to 1st February 1978 and that between them, they have a face value of HK$790,842.89. So far as the 3rd defendant is concerned, the plaintiff's allegation is that between 30th November 1974 and 28th January 1978, a total of 145 cheques with a total face value of HK$1,772,822.93 were drawn on its account and that each cheque had been forged by Leung. The claim has not been pursued it relation to 8 cheques, others are admitted by the 3rd defendant to have been forged and the upshot is that I have to decide whether or not some 53 cheques were forgeries.

9. The evidence is that all 104 of the Bank of Tokyo cheques were forged. It is not contradicted. It comes in the first place from Mr. Chen who says that the signatures on the cheques are not his. It comes also from Mr. Welch, a handwriting expert, who agrees with Mr. Chen and comes independently to the same conclusion. His report is there to be seen and his evidence was not challenged. Leading counsel for the Bank of Tokyo set Mr. Chen an examination in the witness box. It was testing but perfectly fair. Mr. Chen passed with flying colours. I am satisfied that all 104 cheques were forged and moreover, I am satisfied that they were forged by Leung. With the exceptions of numbers 1 to 5 inclusive and number 7 on Schedule B to the Statement of Claim the are set out in that Schedule and Schedule G. They represent a very substantial proportion of the transactions passing through the account both numerically and in terms of value, and this was at a time when the Texturizing Division had all but closed down.

10. The 53 cheques in issue between the plaintiff and the 3rd defendant are all from Schedule C to the Statement of Claim. They are numbered 73, 74, 80 to 106 inclusive, 108 to 113 inclusive, 115 to 127 inclusive, 129 to 131 inclusive, 133 and 134. There is a conflict of evidence about these cheques. Mr. Chen says that none bears his signature. In his report Mr. Welch appeared to agree, with the reservation that he considered it possible that Mr. Chen might have deliberately altered his own signatures so as to make them appear to be forgeries. I dismiss that theory. When called to give evidence for the plaintiff, Mr. Welch was less sure. After telling me about his qualifications, experience and method, he first of all confirmed the contents of his report but later said that he was unable to exclude the possibility that the cheques were genuine. Mr. Diamond, in his submission, has it that Mr. Welch said he could not say one way or another whether the cheques were forged. That may be right but the effect of his evidence, as a whole, on my mind, was that the 53 cheques probably were forged. There was another expert witness, Mr. Davies who said that the cheques were genuine though he had "some small doubt" about it. In cross-examination of Mr. Chen:, Mr. Diamond adopted the method used on behalf of the 2nd defendant. He showed the witness 20 cheques on which only the signature was visible. The witness was invited to go through them saying whether the signature was his or not. This he did at some speed and got 4 of them wrong or, at least, what he said was inconsistent with his earlier evidence. Once again, I comment that it was a severe test but not unfair. Now, I will not say that I was unimpressed by the evidence of Mr. Welch and Mr. Davies. Within the limits of what is known not to be an exact science, they have given me considerable help. For one thing, they ware both able to confirm Mr. Chen's evidence unreservedly as to 77 of the cheques in Schedule C and 3 cheques in Schedule H. Mr. Welch, was not as emphatic in its favour as the plaintiff might have wished, but certainly did not contradict Mr. Chen on the 53 cheques. Mr Davies was not able to assert positively that any single one of the cheques was not a forgery. They might have helped me even more had they been content to leave the role of advocate to the eminent leading counsel who appeared for the protagonists Of the three witnesses on the issue, I found Mr. Chen the most impressive. I think he is better able than anyone else to recognise his own signature and I am quite sure that, if in doubt, he is fair-minded enough to say so. His evidence as to one of the 53 cheques, No. 532686, has been inconsistent and I am not satisfied as to that. With regard to the remaining 52, I am.

11. Where in any instance, the plaintiff has not persisted in his allegation of forgery or I have not been satisfied that a particular cheque was forged, I do find that Leung obtained the signatures by fraud. That resulted in the plaintiff's bank account being debited and the plaintiff suffering loss to an equivalent amount. Those cheques, therefore, which are to be subtracted from the schedule of forged cheques must be added to the claim against the 4th defendant, for the amount of which, I find the plaintiff is entitled to judgment in any event. I do not propose to make a calculation now. Suffice it to say, for the time being, that the sum is in excess of HK$1,300,000.

12. So, as I find, the defalcations remained undetected for over five years. They involved approximately 500 cheques of which about 300 were forged. The total face value of the cheques was approximately HK$ 7,000,000. The question cannot be avoided. How was Leung able to get away with it for so long?

13. The short answer is that Leung was trusted. He was in a position to manipulate the accounts for which he was responsible, and the plaintiff's system of internal control was ill adapted to either prevent fraud taking place or to find out about it afterwards. Mr. Yorke did not dissent in his speech from the assessment that the system was adequate to guard against error but had not been designed to deal with dishonesty. Provided the office staff were honest, little could go wrong and, indeed, apart from the 4th defendant's activities, little did go wrong over the relevant period. But put a clever and resourceful thief in the position of accounts clerk and there was every chance for fraud to succeed.

14. The plaintiff's system of internal control had been devised by their first thief accountant, a Mr. So. Its operation has been shown on a chart. I do not think that it is necessary to analyse the system further than to say that an accounts clerk with responsibility for a particular division had almost total control of the receipts and payments side of the accounts including the handling of incoming cheques, the recording of receipts and, subject to being able to produce supporting -vouchers, the making and recording of payments. Leung was always able to produce vouchers if needed by forging them. He forged them in advance if he was presenting a chen to me Chen for signature and at sometime before the annual audit in every other case. When the plaintiff's external auditor, Mr. Tam, had pointed out to him in cross-examination the lack of any proper division of function, he agreed that such a division was elementary to a proper system of internal control. And although, as I find, he as dealing with the question of preventing fraud he had previously told me that the prevention of fraud ought to be one object of any commercial accounting system. It seems strange, therefore, that even if the frauds themselves were not shown up on annual audit that the auditors dial not recommend any changes to the system even though, as Mr. Tam said, they might be achieved without the employment of a single additional member of staff. So, taking full advantage of this defect in the system, Leung was able to teem and lade, adjusting the record of receipts so as to disguise the reduced monthly balance. Subsequently, in the case or forged cheques, it seems that by writing up the transaction and raising documents which appeared to support it, he was able to escape detection by the auditors: But as to how that was achieved, the evidence is not entirely clear.

15. Given the shortcomings of the system, it was essential that there should be a high degree of supervision. There was not. Indeed it appears that there was none. Cheque books were left in a unlocked steel cabinet. Cheque counterfoils were not completed as a matter of course. It was not necessary for cheques to be used sequentially or even to be taken from one cheque book at a time. In the case of Mr. Chen, a second signature was not necessary. But most important, I find, was the failure to check what Leung was doing and in particuatar, the failure to check or supervise his reconciliations of the monthly bank statements. Until he retired, Mr. Wang was supposed to do it. He was the chief accountant and office manager and was, no doubt, very busy, but Mr. Chen had given him the job of supervising the accounts clerks and one of the checks he ought to have made was of the monthly reconciliations. Perhaps, he did check from time to time but he cannot have done it properly because if he had, the frauds would have shown up immediately. Mr. Clutterbuck told me that a proper bank reconciliation is carried out line by line and a proper check of a bank reconciliation must be done in the same way. Mr. Clutterbuck, who is an experienced chartered accountant and was called by the plaintiff, also said that the system which the plaintiff employed was not reasonably sound and that it was inadequate for any company. From the point of view of preventing or detecting fraud, I agree.

16. A forged cheque is no mandate to pay and, prima facie, the plaintiff is entitled to be relieved. The onus is cast upon the defendant banks to establish affirmatively that all or some of the debits relating to forged cheques should remain. None of the banks persist in the allegations of ratification and adoption which were pleaded, nor do those who made it continue the allegation that the plaintiff has failed to mitigate its loss. Each of the banks does rely upon the following grounds:-

I propose to consider each ground in turn having regard to the facts found as they separately affect the defendants.

(a)     vicarious Liability

17. If right, the proposition must constitute a complete defence for all three banks. It would either afford them a cause of action for a sum equal to the value of the forged cheques or give rise to an estoppel. Other Leading Counsel adopted in advance the submission of Mr. Diamond for the 3rd defendant which ran like this. The plaintiff owed a contractual duty to exercise reasonable care in executing its written orders so as not to mislead the bank or to facilitate forgery. ⁽⁷⁾ That duty was delegated to the 4th defendant who filled in the blank cheques for Mr. Chen to sign, performed bank reconciliations and controlled the relevant accounting procedures. It does not matter that tile frauds were for the benefit of the 4th defendant and not the plaintiff or that they involved forgery. ⁽⁸⁾ The plaintiff must answer for its servant's negligence or fraud in performing that duty. Mr. Diamond relies upon words of Lord Denning in Morris v. C.W. Martin & Sons Ltd. ⁽⁹⁾ which was a case concerning the theft of a fur coat by the servant of a sub-bailee. Lord Denning said:

"From all these instances we may deduce the general proposition that when a principal has in his charge the goods or belongings of another in such circumstances that he is under a duty to take all reasonable precautions to protect them from theft or depredation, then if he entrusts that duty to a servant or agent, he is answerable for the mariner in which that servant or agent carries out his duty. If the servant or agent is careless so that they are stolen by a stranger, the master is liable. So also if the servant or agent himself steals them or makes away with them."

That proposition as expressed by Lord Donning has been applied by the Privy Council ⁽¹⁰⁾ and approved by the House of Lords ⁽¹¹⁾ and, of course, it is accepted by me. But I cannot do as Mr. Diamond asks and apply it to the facts of this case.

18. Mr. Diamond has not attempted to argue that Leung had been clothed with cstensible authority within the principle in Lloyd v. Grace, Smith, ⁽¹²⁾ nor would it have been possible to do so. The argument proceeds upon the premiss that the plaintiff had delegated to Leung its duty of care in the execution of its written order, in other words, the drawing of its cheques. The premiss is false. The cheque is drawn by the person signing it and the authority to sign was given only to the approved signatories. The words of Lord Denning may have been apt had one of them been guilty of fraud. But that is not this case. The submission fails.

(b)     The so called wider duty

19. If the duty exists then I accept chat the standard of care is as propounded by Mr. Morritt:

"The plaintiff was required to take such precautions as a reasonable customer in his position would take to prevent such cheques being presented to his bank for payment".

Again assuming the duty, I would find on the facts that the plaintiff was in breach in relation to all three banks. In the circumstances, the failure to take the steps which I have enumerated to prevent the forgeries and thereafter to uncover them would amount in my judgment to a failure on the part of the plaintiff to take such precautions as would be reasonable for a customer in its position. I do not distinguish between the defendants. The 2nd and 3rd defendants can show that the fraudulent course of conduct continued over a long period of time thus emphasising the breach of duty, if duty there was. The 1st defendant is able to say that the continued employment of Leung at a time when the plaintiff ought to have known of his dishonesty was a breach of the duty of care owed to it.

20. Strictly, I do not think that the breach of the assured duty leads, as submitted, to an estoppel, but to a claim which in each case would be sufficient to extinguish the plaintiff's cause of action. But it is all one, perhaps, since as authorities suggest the banks' claim may be treated as if it were an estoppel to "avoid ci cuity of action''.⁽¹³⁾

21. It is the existence of the duty which is in question. The defendants contend that it exists in contract and independently in tort. I consider first the position in contract. This is the main thrust of the 1st defendant's case trough adopted by the others. Undismayed by the weight of authority against him. Mr. Morritt, if I may say so, has constructed a subtle and seductive argument. I hope that in attempting a summary, I am able to do it justice.

22. The starting point is the well known passage in the judgment of Atkin L. J. in Joachimson's case ⁽⁷⁾:

"I think that there is only one contract made between the bank and its customer. The terms of that contract involve obligations on both sides and require careful statement. They appear upon consideration to include the following provisions. The bank undertakes to receive money and to collect bills for its customer's account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the bank where the account is kept, and during banking hours. It includes a promise to repay any part of the amount due against the written order of the customer addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business for two or three days, it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer on his part undertakes to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. I think it is necessarily a term of such contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank at the branch at which the current account is kept."

I am incited to observe that the statement is not intended to be exhaustive of the contractual obligations of the parties to the contract and that it is possible to read into the passage, some notion of reciprocity which had earlier found expression in the speech of Lord Haldane in London Joint Stock Bank v. Macmillan ⁽¹³⁾ :

"But the customer of a bank is under a yet more specific duty. The banker contracts to act as his mandatory and is bound to honour his cheques without any delay to the extent of the balance standing to his credit. The customer contracts reciprocally that in drawing his cheques on the banker he will draw them in such a form as will enable the banker to fulfil his obligation, and therefore in a form that is clear and free from ambiguity. The correlative obligation is thus complementary to the obligation of the mandatory to apply the balance in paying without delay the cheques as and when presented to him."

So, it is said, the obligations of the customer are reciprocal to or correlative of those of the bank. In 1968, in Selangor's case, ⁽¹⁴⁾ it was decided for the first time that a bank owed its customer a duty of care beyond the strict observance of the customers mandate. Ungoed-Thomas J. stated the enlarged duty thus:

"So this case likewise, in my view, goes to indicate that the bank has a duty of care to its customer in respect of thc conduct of its customer's business as Bankes L.J. said and not morely in interpreting its customer's instructions: that that duty may in the circumstances require that the bank should make inquiries before acting and for that purpose to postpone honouring the customer's cheque: and that the test of care required in the performance of the bank's duty is an objective test of reasonableness."

That wider duty of care on the paving bank has been reasserted in Karak Rubber Co. v. Burden. ⁽¹⁵⁾ It is argued that the reciprocal or correlative duty which must by implication rest upon the customer is the one for which the defence contends. Fairness and justice requires, it is said, that the customer should be under an implied duty to exercise reasonable care in carrying out its part with regard to operations within its contract with the bank, that being the correlative of tire bank's duty "under its contract with its customer to exercise reasonable care and skill in carry out its part with regard to the operations within its contract with its customer."⁽¹⁴⁾

23. Mr. Morritt goes on to refer me to decisions in Canada and the United States which, he says, support his proposition and ought to be regarded by me as strong persuasive authority. Morgan v. U.S. Mortgage & Trust Company was decided by the Supreme Court of New York in 1913. ⁽¹⁶⁾ That was really a case which turned on the duty of a customer to report discrepancies in his passbook after it had been returned to him with the paid cheques and is more pertinent to the submission yet to be considered with regard to the narrower duty. Yet there can be extracted from it some support for the general proposition. This passage appears in the opinion of Hiscock J. when speaking of the duty of the customer:

"Negligence in this case means the neglect to do those things dictated by ordinary business customs and prudence and fair dealing towards the bank which if done would have prevented the wrong doing which resulted from their omission."

In the headnote, there is this statement of principle:

"It is however permitted for a bank to escape liability for repayment of amounts paid out on forged cheques by establishing that the depositor has been guilty of negligence which contributed to such payments and that it has been free from any negligence."

Stronger and more recent support comes from the decision of the Ontario Court of Appeal, upholding a decision of Montgomery J. at first instance, in Canadian Pacific Hotels Limited v. Bank of Montreal.⁽¹⁷⁾ The facts of the Canadian case do bear some comparison to those of the instant one. The learned judge was critical of the plaintiff's internal control system and in particular of the practice of delegating to the fraudulent servant without proper supervision, the task of reconciling bank statements. The decision at first instance turned upon a breach of both the wider and the narrower duty but the Court of Appeal seems to have considered that only breach of the narrower duty was involved. Montgomery J. anticipates Mr. Morritt's submission, and I make no apology for setting out a substantial portion of his judgment.

"I cannot see that a large sophisticated bank customer who receives daily statements of account from its bank whose daily bank transactions amount to many thousands of dollars, can be absolved of responsibility for checking the accuracy of those statements in respect of cheques bearing forged signatures. If the bank is to be held liable to its customer for honouring cheques bearing forged signatures surely it must be considered a part of commercial custom that the customer take steps to identify forgeries and prevent their recurrence as part o normal business practice. The Price Waterhouse report indicated unequivocally that had CP Hotels followed proper accounting practices and procedures, Sigulim would not have been able to succeed in his scheme. Such practices and procedures necessarily include proper bank reconciliations.

As indicated previously, the principles of loss allocation in the various aspects of cheque forgery are somewhat imperfect and arbitrary. In enacting s. 49(1) of the Bills of Exchange Act, the Legislature clearly did not intend that strict liability be imposed upon the hank. A statutory defence is available if the bank can lead evidence to show that the customer is precluded from setting up the forgeries. One such established ground of preclusion is evidence that the customer was so negligent in the conduct of his business affiars as to permit a fraudulent clerk to raise the amount payable on cheque. The customer thus has a positive duty to employ business procedures that minimize this one aspect of cheque forgery. But can it be said that the duty stops there? Surely the customer is also concerned with minimizing forgeries involving fictitious and non-existent payees since s.21(5) of the Act casts these losses upon the customer. Having established business procedures to minimize its risk of loss can the customer then sit back and say it has no concern with guarding against forged signatures since the loss will fall upon the bank?

In a commercial context an efficient internal control system is designed to prevent frauds against the corporation without regard to specific provisions of the Bills of Exchange Act. In my opinion a bank dealing with a sophisticated commercial customer has a right to expect that the customer will have such internal controls in place. The customer owes a duty to the bank to operate an acceptable internal control system so that both the bank and its customer are jointly engaged in prevention and of  minimization losses occurring through forgeries."

One of the Judges of Appeal thought that the decision went beyond what was open to either the court of first instance or the Court of Appeal to find, having regard to previous authority, and in due course, I understand, the decision is to be considered by the Supreme Court of Canada. Nevertheless, the approach of Montgomery J. is commended to me, and I am invited to take the bold cause of departing from principles laid down by Mr. Justice Bray in 1909 and followed ever since in England, Australia, New Zealand and Hong Kong. It is said that there is no previous authority which binds me and no reason of policy or good sense which should persuade me to adhere to the hitherto accepted approach. It is not suggested that there is any custom or business practice to support the implication of such a term but I suppose that it is contended that it may be implied from the presumed intention of the parties or that it is necessary to give business efficacy to the contract.

24. I cannot accede to the submission. Leaving authority on one side, I think that the argument that the term should be implied because it reciprocates the duty on the bank lacks force for the reason Mr. Yorke put forward, namely that whilst the bank transacts its customers business, the customer does not transact any part of the business of the bank. There is no fundamental or compelling reason why justice, fairness or common sense should lead to the implication of a term for which the bank could have expressly stipulated and which is not necessary, as I find, to give business efficacy to the contract. Nor do I thin it could ever be said to be the presumed intention of the parties in the known state of English Law at the dates when these accounts were opened to include a term which would cast a previously unrecognised duty upon the customer. I would respectfully adopt the approach of Mr. Justice Bray who considered an almost identical submission. ⁽¹⁸⁾

"It amounts to a contention on the part of the bank that its customers impliedly agreed to take precautions in the general course of carrying on their business to prevent forgeries on the part of their servants. Upon what is that based? It cannot be said to be necessary to made the contract effective. It cannot be said to have really been in the mind of the customer, or, indeed, of the bank, when the relationship of banker and customer was created. What is to be the standard of the extent or number of the precautions to be taken? Applying it to this case, can it be said to have been in the minds of the directors of the company that they were promising to have the passbook and the cash-book examined at every board meeting, and to have a sufficient number of board meetings to prevent forgeries, or that the secretary should be supervised or watched the chairman? If the bank desire that their customers should make these promises they must expressly stipulate that they shall. I am inclined to think that a banker who required such a stipulation would soon lose a number of his customers. The truth is that the number of cases where bankers sustain losses of this kind are infinitesimal in comparison with the large business they do, and the profits of banking are sufficient to compensate them for this very small risk. To the individual customer the loss would often be very serious; to the banker it is negligible."

I do not think that the views expressed have lost any of their force in the intervening years and I am encouraged in so thinking by the robust judgment in 1981 of Murphy J. as a member of the High Court of Australia.⁽¹⁹⁾

25. But whatever view I might take on grounds of policy, and I am far from being satisfied that it is ever right for a judge of first instance to allow such considerations to persuade him to depart from a settled approach whether bound by previous decisions or not, there is a weight of authority which compels me to reject the defence submission. The statement of the limits of a customer's duty as appears from Kepitigalla ⁽¹⁸⁾ has been expressly approved by the House of Lords in Macmillan's case, ⁽¹³⁾ Viscount Haldane remarking that Bray J. had stated the principle "with conspicuous lucidity". Though Atkin L.J. may not have been attempting to give an exhaustive statement of a customer's obligations, he cannot have been ignorant of the decision in Kepitigalla ⁽¹⁸⁾ or of the observations in the speeches in Macmillan. ⁽¹³⁾ More recently the passage which I have cited from the judgment of Bray J. was referred to with approval by McNeill J. in Wealden Woodlands (Kent) Limited v. National Westminister Bank. ⁽²⁰⁾

"These passages I find wholly consistent with the other authorities to which I have referred and I note that, not merely was it not the subject of appeal, but that it stood uncriticised for over 70 years.''

The learned judge was concerned with the narrower duty, it is true, but his observation is apt in the present context. In 1975, the New Zealand Court of Appeal rejected the concept of a wider and a narrower duty of care on the customer.⁽²¹⁾ Richmond J. delivered a judgment with which the other members of the Court agreed. In the course of it, he said:

"The Kepitigalla case was cited with approval by Lord Finlay L.C. in the Macmillan case, and also by Viscount Haldane in the passage which have already cited. I know of no sufficient reason why we should not retain in New Zealand, the principle so clearly laid down by the House of Lords that the only type of negligence on the part of a customer which will remove from the banker the risk of paying on a forged cheque is negligence in or immediately connected with the drawing ,f the cheque itself."

In Hong Kong, Mr. Justice Leonard in Asien Pazifik Merchant Finance Limited v.Shanghai Commercial Bank Limited ⁽²²⁾ rejected similar submissions to those confronting me. And more recently still, Mr. Justice Fuad indicated what his attitude was likely to he if called upon to decide the point. ⁽²³⁾

He said:-

"As the pleadings stood, part of the defence gave promise of interesting submissions that the Court should disassociate itself from a line of decisions of high authority in a number of Commonwealth jurisdictions to hold that in the circumstances of this case the bank was entitled to succeed upon a defence based on Wah Shing's negligence in not exercising reasonable care over the custody of the cheque books and in failing to examine the bark statements over a period of 14 months. In the eves Mr. Martin Lee for the bank did not urge such contentions upon me. If I may say so, with respect, I think this was a responsible decision and I am bound to say that as a Court of first instance I would not have been inclined to presume to disturb precedents followed and acted upon for some 90 years on the basis of which banks and the business community have no doubt for long conducted their affairs."

I respectfully agree.

26. Another branch of Mr. Morritt's argument is that Kepitigalla followed upon a line of authority in which the customer's duty was said to depend upon it being the proximate, immediate or direct cause of the loss. That says Mr. Morritt is no longer the test in the light of more recent authority culminating in the decision of the House of Lords in Junior Books Limited v. Veitchi Co. Limited. ⁽²⁴⁾ Now he submits the test is one of reasonable foreseeability and, therefore, to the extent that Kepitigalla ⁽¹⁸⁾ depended upon the earlier authorities, it is no longer good law. With respect to that argument it seems to me that what was being considered in kepitigalla was the customers' contractual duty towards the bank and not some alternative or additional duty in tort. Also the earlier authorities to which I was referred running from Bank of Ireland v.Trustees of Evans Charities ⁽²⁵⁾ down to Lewes v. Sanitary Steam Laundry Limited, ⁽²⁶⁾ which I shall have cause to look at more closely in another connection, were concerned not with such negligence as might give rise to a cause of action but with negligence operating as an estoppel. The distinction is, I think, an important one and will call for some consideration at a later stage in this judgment. Nevertheless, the submission proceeds on the basis that the wider duty did exist in tort, that the plaintiff was in breach of that duty and that the banks have consequentially suffered loss. If I had found the duty to exist in contract, I think that I may well have been persuaded to find a coterminous duty in tort. Put if I am right in holding that the plaintiff owed no such duty in contract, is it, nevertheless, possible for the same duty to arise in tort even though it relates directly to the performance of the contract between the parties? That would seem surprising. Midland Bank 'Trust Co. Limited v. Hett, Stubbs and Kemp (a firm) ⁽²⁷⁾ and Ross v. Caunters ⁽²⁸⁾ are authorities for the proposition that these may be independent but coextensive duties in contact and tort, but no authority suggesting a wider or larger duty in tort has been cited to me and I hold there to be none.

(c)    The so called narrower duty

27. Again, making the assumption that there is such a duty, I accept that the standard of care would be as suggested by Mr. Morritt:

"The plaintiff was required to take such steps to check his monthly bank statements as a reasonable customer in his position would take to enable him to notify the bank of any items debited therefrom which were not or may not have been authordsed by him."

Making the same assumption as to the existence of the duty, on the facts found and particularly with regard to the failure to check bank statement reconciliations, I would hold that there had been a breach of that duty on the part of the plaintiff in relation to all three defendant banks. As in the case of the wider duty, I do not think that breach of the narrower duty would give rise to an estoppel but to a claim for damages sufficient to extinguish or defeat the plaintiff's cause of action.

28. Except that it is less ambitious, Mr. Morritt's contention that the narrower duty results from an implied term of the contract is the same as his contention in support of the wider duty. It is true that he is able to offer more North American authorities in which the existence of the duty has been upheld. Indeed, one of them Leather Manufacturers' Bank v. Morgan ⁽²⁹⁾ was cited to Mr. Justice Bray in Kepitigalla. And I think that I am right in saying that in the United States, the proposition now has the force of statute. But the authorities to the contrary to which I have previously referred are just as strong in denying the existence of this implied term as they were of the other and the same reasons which persuaded me to reject the wider proposition lead me to the same conclusion in respect to the narrower one. It also follows from my earlier reasoning that in the absence of any contractual duty upon the customer to check his monthly statements, there can be no equivalent duty arising in tort.

29. I should not leave this ground of defence without making some reference to the interesting submission put foulard by Mr. Chang on behalf o the 2nd defendant. He referred me to clause 10 of the agreement between the 2nd defendant and the plaintiff. I have set out its terms elsewhere. He did not, as I understood, invite me to construe that term as expressly imposing a duty upon the plaintiff to check his monthly bank statements and notify any unauthorised debits but he did ask me to view it as a circumstance making the existence of an implied term to that effect more probable. The submission went in this way. There is a continuing duty on both the bank and the customer to act with reasonable care to ensure the proper working of the account. ⁽³⁰⁾ The continuing duty in turn involves, at least in the case where the contract between them expressly requires the customer to confirm to the bank without delay periodic statements of the customer's account rendered by the bank, a duty on the part of the customer to check and verify the entries in the statements with reasonable care and to inform the bank within a reasonable time of any discrepancies. That formulation produces an attractive hybrid but I cannot accept it. It seems to me that the existence of the express provision, if that is what it is, goes to negative rather than to support the implication of any additional duty.

(d)    The monthly bank statements

30. Common to the defences of all three banks is the contention that the bank statements have become conclusive of the state of account between them and the plaintiff and cannot now be re-opened. This is a separate ground of defence from estoppel and depends upon an express or implied agreement between the parties. Whether the effect of such an agreement, sometimes called a verification agreement, sometimes a conclusive evidence clause and by Mr. Diamond an exceptions clause, is to produce a true account stated seem to me to he doubtful. For one thing, an account stated is bind binding on both parties, a conclusive evidence clause need not be. What is clear, however, is that the basis for this defence lies contract. There is no doubt that the parties may reach an express agreement which will have the result of preventing one or both contradicting the entries in the bank statement. There has been doubt in the past as to whether to failure to object to an error in the passbook or bank Statement would have the same effect. ⁽³¹⁾ I accept Mr. Diamond's submission, again adopted by other counsel, that the effect of the earlier authorities and in particular of Devaynes v. Noble, ⁽³²⁾ Blackburn. Building Society v. Cunliffe, Brooks & Co. ⁽³³⁾ and Spencer v. Wakefield⁽³⁴⁾ was that where passbooks were sent periodically by a banker to his customer and were hot contested by the customer on the figures entered, an expression of consent was implied to toth the figures and an account stated. I do make the observation, however, that the Master's Report in Devaynes's case speaks of silence being regarded as an admission and no other adjustment, statement or allowance thereafter usually taking place. (My emphasis) Also I o observe that in Blackburn Building Society v. Cunliffe, Brooks & Co., ⁽³³⁾ Lord Selbourne L.C. spoke of the passing to and fro of the passbook as being "evidence of a stated and settled. account" and in Spencer v. Wakefield ⁽³⁴⁾the customer waited ten year's before seeking to question the bank's interest charges and it could be said that the decision rested upon another ground. Nevertheless, I do think that Mr. Diamond is right, as I do also with retard to his second submission or concession that the weight of later English authority is against the preposition. ⁽³⁵⁾ I think that the present position is correctly summarized in this passage from the judgment of Bankes L.J. in Vagliano v. Bank of England ⁽³⁶⁾ which formed no part of the Court of Appeal decision reversed by the House of Lords.

"The plaintiff form time to time received from the bank his pass-book, with entries debiting the payments made, for which the bank sent the bills as vouchers, which were retained by the plaintiff when he returned without objection the pass-books. It was contended that this was a settlement of account between aim and the bank, and that he had been guilty of such negligence with respect to tire examination of the vouchers as would have prevented him from being relieved from this settlement of account. But there was no evidence to shew what, as between a customer and his banker, is the implied contract as to the settlement of account by such a dealing with the pass-book, or that, having regard to the ordinary course of dealing between a banker and his customers, the plaintiff had done anything which can be considered a neglect of his duty to the bank or negligence on his part."

Of course, the effect of a failure to object to entries on the bank statement will vary according to the circumstances of the case. But where, as here, the bank retains the paid vouchers, it is difficult to see how a failure to object could do more than raise a rebuttable presumption that the settlement correct.

31. But in this case, the defendants do riot rely wholly, or perhaps at all, upon any implied agreement because each of them contends that upon a true construction of their respective bank contracts, it will be found that the plaintiff is expressly precluded from re-opening the account. And in particular, each of them contends that it is the term, rule or regulation, which I set cut in my findings of fact,  which gives to each of them this defence. This judgment has become so long, and no doubt wearisome, that it may have been forgotten that the plaintiff asked to open an account subject to the 1st defendant's rules and regulations for the conduct of such account; with the 2nd defendant, the plaintiff undertook to observe the provisions of an agreement on the reverse of the letter of request; on asking to open an account with the 3rd defendant, the plaintiff agreed to comply with the bank's rules and procedures in force from time to governing the conduct of the account. Now provided that the terms of agreement or the rules and regulations referred to are capable of being given contractual effect, I do not see how it can be argued that the plaintiff is not bound by them. Certainly, it may be said that some of the rules are precatory, advisory or instructional but others are hot and in my view, it is a question of construction in any particular case as to whether or not a rule does impose an obligation upon the plaintiff or seeks to declare a legal consequence on the happening of a given event. Fuad J., as he then was, took a different view in Lam Yin-fei's case ⁽²³⁾ but the words which he had to construe were less clear in their meaning and it appears that that the learned judge was much impressed by the fact that the rules in his case could be changed at any time without notice to the customer. If it be the case that my view and that of Mr. Justice Fund cannot be reconciled, then I must respectfully beg to differ. It was said by Mr. Yorke that the rules were like those of a member's club and not intended to create contractual relations. I do not agree. They are not like the rules of a club. Thay are intended to govern a commercial relationship and, in any event, I doubt the correctness of the premiss. ⁽³⁷⁾

32. I have set out elsewhere in my judgment the rules upon which reliance is placed. To paraphrase the relevant portion of each:-

In each case, it is contended that the rule or clause it the circumstances of the present case precludes the plaintiff from challenging the correctness of the bank statements which have been sent to them on a regular basis over the material period. In the case of the 1st and 2nd defendants, it is said that the result has been achieved because either there was no objection in the one case or an absence of confirmation in the other, and in the case of the 3rd defendant, it is said that the actual confirmations which I have found there were must be at least as efficacious to shut the plaintiff out.

33. There have been a number of decisions in Canada where verification agreements or conclusive evidence clauses have been held to be an effective bar to a customer's claim in relation to the debiting of his account with the, amount of a forged cheque. Those cases have held, I think rightly, that it is no answer to a conclusive evidence clause or verification agreement to say that it seeks to protect the bank from liability for fundamental breach. But in each of the Canadian decisions to which I have been referred, the clause or agreement to be construed has peen expressed in the clearest possible language. I shall give two examples. In Arrow Transfer Co. Ltd. v. Royal Bank of Canada,⁽³⁸⁾ the "Verification of Account Agreement" read as follows:-

"In consideration of The Royal Bank of Canada (hereinafter caller the 'Bank') opening or continuing an account with the undersigned, the undersigned hereby agrees with the Bank in respect of each account with the under-signed now or hereafter kept by the Bank at any of its branches or agencies to verify the correctness of each statement of account received from the Bank and if a statement of account and relative vouchers are not received by the 10th day after the end of each month or, if statements are not to be prepared monthly by the 10th day after the end of the term agreed on for their preparation to obtain them from the Bank and within 30 days after the time when they should have been received to notify the Bank in writing at the branch or agency where the account is kept of any alleged omissions from or debits wrongly made to or inaccurate entries in the account as to states and that at the end of the said 30 days the account as kept by the Bank shall be conclusive evidence without any further proof that except as to any alleged errors so notified and any payments made on forged or unauthorized endorsements the account contains all credits that should he contained therein and no debits that should not be contained therein and all the entries therein are correct and subject to the above exception the Bank shall be free from all claims in respect of the account."

In Syndicat des Comionneurs Artisans du Quebec Metro Metropolitan v. Banque Provincale des Canada, ⁽³⁹⁾ the relevant portion of the verification agreement was:-

"2. The customer shall examine the said cheques and other relevant documents and all the debit and credit items on the said statement, and shall notify the bank, in writing, within thirty ⁽³⁰⁾ days of the date of each delivery or that of dispatch by mail, of all errors, irregularities or omissions shown by the said statement. The customer expressly agrees that the production by the Bunk of the record of dispatch and delivery of the said documents and statements, duly initialled by the officials designated for this purpose shall constitute prima facie and indisputable evidence of such delivery, dispatch and receipt to and by the customer of the said documents and statements.

3. On the expiry of this period of thirty days (excepting errors, irregularities or emissions previously notified to the Bank, as aforesaid, and excepting payments made on counterfeit or unauthorized endorsements) the customer agrees once and for all with the Bank that the balance shown in this statement of account is correct, that the said cheques and other relevant documents are authentic duly chargeable and debited to his account and that he has no right to be credited with any sum which is not shown on this statement."

In the Arrow Transfer case, the majority of the Supreme Court of Canada upheld the decision of the court of the first instance that the verification agreement in question was not ambiguous and made the bank statements conclusive evidence against the customer. Whilst agreeing with the decision on another ground, Laskin J. took a different view on the construction of the agreement. It is not for his view or the particular clause that I now cite a substantial portion of his judgment, but for his approach to questions of construction of this kind which I respectfully propose to adopt. ⁽³⁸⁾

"Forgery and unauthorized debits to a customer's account owing to the forgery or fraud of third persons or of employees do not exhaust a bank's liability. There is the quite ordinary case of arithmetic error, of failure to credit sums to an account, of wrongful albeit innocent attribution of debits to an account. These are possible, even if infrequent; perhaps as infrequent as forgery and fraud. These instances of breach of obligation to a customer relate directly to what the bank has sought to achieve through the verification agreement. In my opinion, the principal question is not whether the bank has sought to protect itself against its breach of a fundamental term of its relationship with its customer, but rather what is the scope of protection which it has achieved under a document which is more a contract of adhesion than a bargained arrangement.

Neither forgery nor fraud are expressed as risks of the customer. The key words are "verify the correctness" of statements of account received from the bank; "notify the bank in writing ..... of any alleged omissions from or debits wrongly made to or inaccurate entries in the account". It is in respect of these, unless there is timely notice, that "the account as kept by the bank shall be conclusive evidence" that it is correct, and that, subject to what is excepted (this includes "payments made on forged or unauthorized endorsements")the bank is to be free "from all claims in respect of the account".

I find it strange that a bank which seeks by contract to throw the risk of all forged drawer signatures upon its customer should be so reticent about referring expressly to such an eventuality. It is not as if its verification form subject-matter without it. The verification form, as a matter of words, encompasses the situation which arose in Union Bank of Canada v. Wood. Beyond this or related situations, it surely is, to say "the least, "ambiguous"(to use the term applied by Duff, J., in the Steward case) in any suggested application to forgery on fraud. There is every reason to construe it contra proferentem, and I would therefore conclude that its words do not provide protection against the forgery of the drawer's signature.

The construction that I would put on the verification agreement is consistent with the approach to contractual limitations of liability in other kinds of relationships, such as bailee and carrier and consignor, retailer and purchaser. Risks that are by contract to be passed by a party, upon whom they would otherwise rest, to the other party to the relationship must be brought home expressly if they are to be effective; at least this is so when the limitation would still have subject-matter if unexpressed risks be found to be outside its general language."

I do not overlook tae point that by its contract with the 2nd defendant, the plaintiff undertook to hold the bank free from loss resulting from any failure to observe its provisions. Even so, in none of the terms or rules which I have to consider are forgery or fraud expressed to be risks of the plaintiff. Each of the rules or terns has subject-matter without reference to fraud or forgery. Not one of the rules or terms refers to the account becoming "conclusive evidence". No reference is made in any of the rules or terms to the items which are to be included in the account. In my judgment, there is, in each case, every reason to construe the rule or term contra poferentem and so doing in each case, I conclude that it provides no defence to the plaintiff's claim is this action.

(e)    Estoppel

34. This ground is put in two ways (a) that the plaintiff is estopped from asserting that its account has been wrongly debited by reason of its own negligence and (b) that the plaintiff is estopped as under (a) by reason of its representations that the bank statements were correct. In considering the first of those two propositions, perhaps some of us, and certainly 1 include myself, have been guilty of an imprecise use of language and possibly some confusion of thought. It is well, therefore, to go back to first principles. Estoppel is a rule of evidence which comes into operation if a statement of the existence of a fact has been made by one party or his agent to another with the intention that the other should act upon the faith of the statement and the other party does act upon the faith of the statement. ⁽⁴⁰⁾ The essentials of the doctrine were clearly set out by Lord Tomlin in Greenwood v. Martins Bank Limited. ⁽⁴¹⁾ They are:-

Negligence as such can never operate as an estoppel. If I may quote from a distinguished writer on the topic^{: (42)}

"The neglect of a legal duty gives a cause of actions; it cannot as such operate as an estoppel. If there is one thing clearer than another in the lair of this subject, it is that an estoppel arises only in favour of a party who has been misled into altering his position for the worse as against the party who has so misled him, and that such misleading can be effected only by a representation:. The representation may be made by (inter alia) abstention from speech or action, if such abstention constitutes a breach of a duty to spear or act, and not otherwise, as has already been explained; but such breach of duty has not the slightest effect as an estoppel unless it induces in the mind of the person to whom the duty is owed a belief in the existence or non-existence of some state of things, in which belief he adopts a course of action to his detriment, which he would not otherwise have adopted. In other words, it is not the negligence per se which estops, but only the representation implied from it. The estoppel to which this false label has been attached is merely one of the many species or illustrations of, and not a class by itself cenerically distinguishable from, a class of estoppel by representation,"

I believe that upon close examination, all the authorities which speak of negligence giving rise to an estoppel are in fact concerned with a representation to be implied from the neglect of a duty. So it was in Bank of Ireland v. Evans Trustees ⁽⁴³⁾ where Baron Parke observed:

"It is clear, we think, that the negligence in the case, if there be any, is much too remote to affect the transfer itself, and to cause the Trustees to he parties to misleading the bank in making the transfer on the forged power of attorney."

In Swan v. North British Australasian Co.,⁽⁴⁴⁾ this passage occurred in the judgment of Blackburn J.:

"What I consider the ,fallacy of my brother Wilde's judgment is this: He lays down the rule in general terms 'that if one has led others into the belief of a certain state of facts by conduct of culpable neglect calculated to have that result and they have` acted on that belief to their prejudice, he should not be heard afterwards as against such person to shew that state of facts did not exist.' This is very nearly right, but in my opinion not quite, as he omits to qualify it by saying that the neglect must be in the transaction itself, and be the proximate cause of leading the party into that mistake; and also, as I think, that it must be the neglect of some duty that is owing to the person led into that belief or what comas to the same thing, to the general public of whom this person is one."

And in Lewes Sanitary Laundry Co. v. Barclay & Co.,⁽⁴⁵⁾ Mr. Justice Kennedy cave his reason for rejecting the bank's defence of estoppel by negligence in this way:

"I am unable to hold that Mr. William Gates Sr. on chat occasion is proved to have done or said anything which could properly be treated by the bank as a representation and assurance, on behalf of the plaintiff company, that the company's account, as it stood in the bank's ledger at that time contained only proper and authorised items of debit, and so prejudiced the bank's position.''

It may very well happen that the neglect of duty which amounts to an implied representation will itself give rise to a cause of action. So it is that the negligent drawer of a cheque may not only be estopped from contesting its genuineness but as in Kepitigalla may also be in breach of an implied term of his contract with the bank.

35. It follows in this case that its failure to operate an efficient internal control system even if stigmatized as negligent could never raise an estoppel against the plaintiff; but if I had found that the plaintiff owed a duty to the banks to check its monthly statements, the negligent performance of that duty or failure to perform is at all might well have raised an estoppel. However, I did not and insofar as the three banks rely upon "estoppel by negligence", they fail.

36. The second limb of the proposition is stronger. The plaintiff returned confirmation slips every month after receiving its bank statements from the 3rd defendant. The slip included these words "I/we acknowledge receipt of your monthly statement of my/our current account with you shorting the following balance which has been examined and found correct" and bore two authorised signatures. There is no doubt, to my mind, that there is a clear representation of fact. But I do not find the other two defendants to be in a worse position. The 1st defendant's rules and regulations, which I have found to be contractual, provide that "in the absence of any objection to the statement within 7 days after its receipt by the customer, the account shall be deemed to have been confirmed." The 2nd defendant's agreement provides that "in tie case of absence of such confirmation within a fortnight, the bank may take the statement as approved by me/us." The contractual effect of those two rules is to turn failure to respond into a representation. In such a case, the defendants need not show the breach of any duty or indeed the existence of one. They may rely simply upon the fact of the representations.

37. I think that it would be right to say that neither the 1st nor the 2nd defendants put estoppel by representation on this basis in the forefront of its defence, but I take the view that the pleadings are adequate to cover the point.

38. I have held that the particular clauses contained in the respective banking contracts of these defendants fall short of producing a true account stated. I have held also that they are not to be regarded as conclusive evidence clauses, that is an express agreement by each party to be estopped, as was found to be the case in Burrouqhs Adding Machines Ltd. v. Aspinall.⁽⁴⁵⁾ Up to now, the largest construction that I have been prepared to place upon any one of these clauses is one which produces that kind of account stated which raises a rebuttable presumption as to its correctness. But that is not to exclude the possibility of a representation on either side as to the correctness or otherwise of the accounts giving rise to an estoppel if the other essential characteristics of estoppel are present, and in holding, as I do, that the representations which I have found to have been made are of such a kind, I believe that I do not say anything which is inconsistent with my earlier findings.

39. I was at one time much exercised with the thought that the plaintiff's representation in each case might be cancelled out by the representations made by the bank. I had in mind the following passage from Sir Alexander Turner's excellent edition of Spencer Bower and Turner: ⁽⁴⁷⁾

"A good affirmative answer to a prima facie case of estoppel is established by proof that the representation relied upon an giving rise to the estoppel was founded upon, or the outcome of, a previous representation made by the representee to the representor. In any such case, the mine of the one party is exploded by the countermine of the other, and nothing remains as the subject of the decision, except the facts. The representee is estopped by   his own representation from setting up that the representor is estopped by his. This is what is meant by the old formula that 'estoppel against estoppel doth put the matter as large'."

After all, by sending out a bank statement, the bank does represent that the statement records genuine transactions passing through the account in the previous month. In Lloyds' Bank v. the Hon. Cecily K. Brooks, ⁽⁴⁸⁾ the bank was estopped from claim claiming back credits wrongly placed to the depositor's account because the depositor had altered her position on the strength of them. But the point has not been taken before me and upon reflection I lave come to the conclusion that the plaintiff's representations do not spring solely those of the defendants'. If the banks represent as I have put it, the plaintiff in turn does not merely represent that the accounts contain only genuine transactions but in assuming as much that the banks are right.

40. Before any one of these representations on the part of the plaintiff could give rise to an estoppel, it would have to be shown in each case by the party making the contention:

No positive evidence has been led save that of the official from the 3rd defendant which I rejected, and as to the continued. operation of the bank account. And, of course, I know that none of the banks was able to pursue its remedy against Leung until after 2nd May 1978. But on the evidence before me and on making such interence from the proven or admitted facts as I think it right to make, I am satisfied that in each case the elements necessary to an estoppel have been made out. I find, in each case, that the detriment to the bank or prejudice suffered has been its willingness to continue to operate the account and to expose itself to the risk of paying cut on forged cheques. In the case of the 2nd and 3rd defendants, I find that there has been an additional prejudice to the bank in that through the passage of time, they have lost their best opportunity for recovering from Leung. I do no find that same prejudice in the case of the 1st defendant which only became exposed to the fraud in November 1977 and I am satisfied that the chances of recovering from Leung have not been substantially diminished in the period November 1977 to May1978. If follows that in the case of the 1st defendant, there eras no operative estoppel arising from the first representation which I find to be that made following the month of December 1977.

41. Therefore, there will be judgment for the plaintiff against the 1st defendant in the terms of the declaration sought, in respect of the forged cheques debited to the plaintiffs account for November and December 1977. There will be judgment for the 2nd and 3rd defendants on the claim. There will be judgment for the plaintiff against the 4th defendant in all sums claimed save in respect of that sum for which I have given a declaration in favour of the plaintiff against the 1st defendant.

42. I shall require the assistance of counsel in calculating the appropriate figures for inclusion in the orders and I should welcome submissions as to the appropriate rate of interest to be awarded and which I propose to award not only in relation to the judgment against the 4th defendant but also on the amount covered by the declaration. I reject the argument that because the sum wrongly debited was in a non-interest bearing account, interest is not recoverable. The plaintiff has lost the opportunity of placing the money at interest which, in my judgment, is all that it is necessary for the plaintiff to show.

(4)   [1957] 1 Q.B. 247

(5)    [1951] P35

(6)    [1966] A.C. 463 at p.669

(7)    Joachimson v. Swiss Bank Corp. [1921] 3 K.B. 110 per Atkin L.J. at p.127

(8)    Uxbridge Permanent Benefit Buildings Society v. Pickard [1939] 2 K.B. 248

(9)   [1966] 1 Q.B. 716 at p.728

(10)    Port Swettenham Authority v. T.W. Wu & Co. [1979] A.C. 580

(11)    Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827

(12)    [1912] A.C. 716

(13)    [1918] A.C. 777 at p.814

(14)    Selanger United Rubber Estates v. Craddock [1968] 1 W.L.R. 1555 at p.1599

(15)    [1972] 1 W.L.R. 602

(16)    208 N.Y. 218

(17)     122 D.L.R. (3d) 519 and 139 D.L.R. (3d) 578

(20)    11th March 1983 (unreported)

(21)    National Bank of New Zealand v. Walpole and Patterson [1975] 2 N.Z.L.R.7

(22)    [1982] H.K.L.R. 273

(24)    [1982] 3 W.L.R. 477

(25)    5 H.L.C. 10 E.R. 950

(26)    [1906] 11 Commercial Cases 255

(27)    [1979] Ch. 384

(28)    [1980] Ch. 297

(29)    [1885] 117 U.S. Report 96

(30)    per Lord Justice Scrutton L.J. in Greenwood v. Martins Bank [1932] 1 K B.371 C .A.

(31)    per Lord Wright in Firm Bishun Chand v. Seth Girdhary Lau [1934] 50 T.L.R. 465 at p.468

(32)    [1816] 1 Mer. 529

(33)    [1882] 22 Ch. D. 61

(34)    [1887] 4 T.L.R. 194

(35)    Chatterten v. London County Bank [1890] The Miller

(36)    [1889] 23 Q.B.D. d. 243 C,A

(37)    Clarke v. Dunraven [1897] A.C. 59

(38)    [1971] 27 D.L.R. (3d) 91

(39)    [1969] 11. D.L.R. (3d) 610

(38)    [1971] 27 D.L.R. (3d) 81 at pp 97 & 98

(43)    5 H.L.C. 389 1 E.R. 950

(44)    2 H & C 175 159 E.K. 73 at p. 76

(45)    [1906] Commercial Cases 255 at p. 269

(46)    [1925] 1 T.L.R. 276 C.A.

(47)    3rd edition paragraph 155

(48)    December 15th, 1950 reported Journal of the Institute of Bankers Vol. 72 114

Representation:

R. Yorke, Q.C., C. Ching Q.C. & R. Tang (Therese P.F. Chow & Co.) for Plaintiff.

A. Morritt, Q.C. & O.V. Cheung, Q.C. & A. Li (Deacons) for 1st Defendant.

D. Chang, Q.C. & R. Faulkner (D.W. Ling & Co.) for 2nd Defendant.

A. Diamond, Q.C., K. Bokhary, Q.C. & M. Delgado (F. Zimmern & Co.) for 3rd Defendant.

4th Defendant - absent

W. Wong & A. Fung (Foo & Li) for 5th Defendant.

___________

Not recorded in the written judgment but stated in the open Court and appears in the Clerk's Notes