Lam Yin Fei t/a Wah Shing Garment Manufacturing Co and Another v. Hang Lung Bank Ltd

HCA003037/1980

H.C.A. No. 3037 of 1980

Banking law - 38 cheques drawn on customer's account with forged signatures debited to account over period of 14 months - customer not involved with fraudulent manipulation of account - the onus on the bank to show that the wrongful debits should remain is not discharged without express language in contract that after examination of statements of account and failure to report errors, the account shall be taken as conclusive.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Fuad, J.

Date: 8 April 1982

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JUDGMENT

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1. Madam Lam Yin Fei is the sole proprietor of the Wah Shing Garment Manufacturing Company ("Wah Shing") which specializes in making and selling baby clothes. She runs the business with her husband Mr. Chan Cheon Wah. On the 17th February 1975 they decided to open an account with the Western Branch of the Hang Lung Bank Ltd. ("the Bank") conveniently close to their factory. The account, which the Bank designated as a "Proprietorship Account", was in the name Wah Shing and Mr. Chan was to be the sole signatory for cheques drawn upon it. An overdraft facility for $30,000 was arranged.

2. In March 1978 Wah Shing engaged a Miss Lee Chi Lin to keep the accounts. Although she was not a qualified accountant she had had appropriate previous experience. When the time came for the accounts to be prepared for the year ending the 31st March 1979, Miss Lee seemed to be taking a long time over them and by the beginning of June, Mr. Chan's growing suspicions led him to call in a professional accountant who confirmed his worst fears. He reported the matter to the Police and on the 11th June wrote to the Bank asking them to stop all further transactions on the account.

3. It transpired that 38 cheques dated between the 8th April 1978 and the 10th May 1979 had been honoured by the Bank upon Mr. Chan's forged signatures and that, as a result, the Wah Shing account had been wrongly debited with amounts totalling $245,930.80. Miss Lee and a male accomplice pleaded guilty to certain offences relating to the forgery and uttering of most of the cheques and were each sentenced to two years' imprisonment. I would mention here that although the Bank put Wah Shing to strict proof of the averment that the signatures on the relevant cheques were indeed forged, by an early stage of the trial this no longer remained a live issue. No suggestion was made that either Mr. Chan or his wife were in any way implicated in the fraudulent manipulation of the account. It must be said, too, that the forgeries were very skilfully executed and no blame could possibly be attached to the Bank for paying out on any one of the cheques. It therefore became my task to decide upon which of the two innocent parties the loss should fall. At the conclusion of the hearing on the 31st March 1982 I decided that the Bank must bear the loss, and I now give my reasons.

4. 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 bank statements over a period of 14 months. In the event 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. These authorities are collected and reviewed by the New Zealand Court of Appeal in National Bank of New Zealand Ltd. v. Walpole and Patterson Ltd.* [1975] 2 NZLR 7 and by Leonard J. (as he then was) in an unreported decision in an 0.14 application : Asien-Pazifak Merchant Finance Ltd. v. Shanghai Commercial Bank Ltd. (H.C. Action No. 4403 of 1978).

5. And thus the onus is on the Bank to establish that there are other grounds upon which they are entitled to say that the wrongful debits should remain. I would respectfully adopt the approach of Richmond J. who gave the leading judgment in the National Bank of New Zealand case, at p.12:-

"The first point is that it is admitted by the bank that all the cheques forged by Berry were in fact forged. Accordingly, the starting point is that the company, in relation to those cheques, established a prima facie case that the corresponding debits made by the bank were made without any mandate from the company. This meant that the bank statements referred to from time to time by the bank were not a true representation of the state of the current account and would require rectification. To avoid this prima facie result it was necessary for the bank affirmatively to establish in some way that the debits, or some of them, ought nevertheless to be permitted to remain."

6. To discharge the burden on the Bank, Mr. Martin Lee relied on the documents that were signed by Madam Lam and her husband at the time the account was opened. Since my decision turned on the status and construction of these documents (both had their Chinese versions) it is necessary for me to set out their terms. The first document is headed "Proprietorship Account" and was signed by Madam Lam. It bears Mr. Chan's specimen signature. It is dated the 17th February 1975 and is addressed to the Bank. It says -

"I, the undersigned, Lam Yin Fei, having opened a current account with you in the name of Wah Shing Garment Mfg. Co. Ltd. of Cheung Fat Industrial Building, 2nd floor, Block A, 1-9 Hill Road, Shek Tong Tsui, Hong Kong, hereby certify that I am the sole proprietor of this firm and I authorize you to honour all cheques, orders or other banking documents whatsoever whereon one of the following one signatures together with the chop of my firm as per specimen given below shall appear whether the account of my firm has sufficient funds or not at the time of your honouring such cheques or other instruments aforesaid.

I agree to comply with and be bound by the Bank's rules for the time being (a copy whereof is now in my possession) for the conduct of such account.

This authority shall remain in force until I give you notice to the contrary in writing."

The second document is as follows -

"      Rules for Current Accounts

7. Mr. Martin Lee contended that when the second sentence of the first document is read with para. 3 of the second, it became clear that since the customer had agreed to comply with, and be bound by, the Bank's request to examine the monthly statements carefully and agreed that if errors were not reported within the time stipulated the Bank was entitled to regard the statements as having been verified and found correct, the effect of non-compliance with the rules must be that the customer can no longer complain about any of the debit entries. Mr. Lee also relied on the words which appear at the foot of each of the monthly statements: "Note: If no errors are reported within 10 days, this statement of the account will be considered as correct" for they served as a constant reminder to the customer. All this, he submitted, was the necessary consequence that flowed from the plain language used.

8. Banks and their customers are, of course, free to agree expressly regarding the circumstances in which entries in a statement of account are to be conclusively presumed to be correct. To quote from Richmond J. again, at p.19 of the report of the National Bank of New Zealand case he said -

"As was pointed out by Bray J. in Kepitigalla Rubber Estates Ltd. v. National Bank of India Ltd. [1909] 2 K.B. 1010, 1025, it has always been open to banks to enter into special contracts with their customers setting out any special requirements which they demand. I understand that in fact this practice is on the increase in various Commonwealth jurisdictions, but it was not followed in the present case."

9. From the cases cited to me it seems that such a practice is quite common in Canada for there have been a number of cases in which what have come to be known as "verification agreements" have been construed and applied. Many are discussed in the decision of the Supreme Court of Canada in Arrow Transfer Co. Ltd. v. Royal Bank of Canada (1971) 27 D.L.R. (3d) 81. In that case the Court held that an agreement in the following terms was effective to bar any claim made in respect of cheques drawn against a customer's account and paid by the bank although bearing only a forgery of his signature as drawer -

"In consideration of THE ROYAL BANK OF CANADA (hereinafter called the "Bank") opening or continuing an account with the undersigned, the undersigned hereby agrees with the Bank in respect of each account with the undersigned 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 so stated 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 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."

10. In B. and G. Construction Co. Ltd. v. Bank of Montreal [1954] 2 D.L.R. 753, the Supreme Court of Alberta held that a customer who had signed a receipt and verification form as part of the relationship of banker and customer, and forming part of the banking contract, was bound thereby. The form was in these terms -

"The undersigned customer of the Bank of Montreal hereby acknowledges receipt of his/their pass book or statement of current account, showing a balance to the end of the month of May 1952 of $21.01 at debit/credit, together with vouchers for all debit items against the undersigned up to end of period aforementioned, and for valuable consideration the undersigned agrees with the said Bank that he/they will within fifteen days from date hereof, examine the said vouchers and check the credit and debit entries in the said pass book or statement of account (and especially all debit entries purporting to be represented by such vouchers), and will in writing point out to the said Bank any errors therein, and from and after the expiration of said period of fifteen days except as to improper charges or errors previously pointed out in writing, it shall be conclusively settled as between the Bank and the undersigned that the vouchers in respect of all such debit items are genuine and properly chargeable to and charged against the undersigned, and that the undersigned was not entitled to be credited with any sum not credited in said pass book or statement of account."

11. The contract which was held by the Quebec Court of Appeal in Syndicat des Camionneurs Artisans du Quebec Metropolitain v. Banque Provincale du Canada (1969) 11 D.L.R. (3d) 610, to have precluded a customer from later complaining that his bank had paid cheques drawn on his account bearing a forged signature was as follows -

"1.     The Bank shall from time to time deliver to the customer or to his duly authorized representative or else send to the said customer by ordinary mail, a statement of his account with the cheques and other relevant documents connected therewith.

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 Bank 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 omissions 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."

12. It is not necessary to give further examples but, broadly speaking, the form of wording successfully relied upon by the Canadian banks to resist claims by their customers which would otherwise have succeeded have the following elements -               

13. Mr. Henry Litton, for the customer, made a number of submissions regarding the evidence as to what occurred when Mr. Chan and his wife opened the account, and Counsel addressed me at considerable length on the principles to be drawn from the law applicable to exclusion clauses. The analogy might well be apt. In the Arrow Transfer Company case Bora Laskin J. said at p.98 -

"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 bailer, 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."

14. However, for reasons which will shortly appear, I did not feel it necessary to reach any conclusions upon considerations of that kind, for in my judgment the Bank had failed to discharge the onus cast upon them. In my judgment para. 3 of the Bank's "Rules for Current Accounts" cannot be said to contain contractual terms, and nothing is added by a customer agreeing to be bound by its contents. Even if the two documents relied upon, then read together, can fairly be understood to impose an obligation on the customer to check the bank statements, it seems to me that the words should no errors or omissions be reported in writing within ten days from the date of despatch of such statements, the Bank will regard the statements as having been verified and found correct" [emphasis added] cannot, by any fair use of language, be construed as an agreement by the customer that he will not dispute cheques drawn on the account and paid although they bear forged signatures. If such a term were to be implied the Court would have to be satisfied that it was within the minds of both parties to the contract. It is all very well to say that the Bank will look upon the account as correct in certain circumstances, but what is surely needed, if the Bank is to succeed, is a clear acknowledgement that the customer will also look upon them in a similar light. Although the formulae discussed in the Canadian cases have no particular magic about them one has only to contrast them with the words employed here to see how very much stronger and explicit they are.

15. It must also be said that when the "Rules for Current Accounts" are examined as a whole, they do not bear the hallmarks of contractual terms. A customer would, in my view, even if he read them, be entitled to conclude that they were merely instructions and that he was not binding himself contractually to the Bank, for no one would expect to have been so bound by a document which ends as it does -

16. Mr. Martin Lee also relied on the doctrine of estoppel but his arguments were based, as they had to be, on the contention that upon the customer had been cast a duty imposed by contract to speak or act after receipt of the bank statements. In view of the conclusion I reached on the nature of the documents upon which reliance was placed, these submissions could not succeed. The point is made shortly and clearly in Spencer Bower's The Law Relating to Estoppel by Representation (3rd Edition) at p.61 -

"It is firmly established that reticence and passivity in relation to matters which give rise to no legal duty to speak or act, whether censurable in foro conscientiae or not, is not a representation of anything, and accordingly creates no estoppel, any more than it is actionable; and the courts have on the whole steadily repelled the invitations, again and again addressed to them, to pronounce that silence and inaction, in the absence of such duty, is other than justifiable in law, or subjects the party to any liability or disability whatsoever. Accordingly, in a number of authorities, though the omission to speak or act, and the inducement and alteration of position to the detriment of the alleged representee were duly established, it has been held that the alleged representor was not estopped if such omission was no breach of any legal obligation."

17. Finally, Mr. Lee sought to rely on the concept of "adoption or ratification" as explained in Paget's Law of Banking (8th Edition) p.p. 488-491. At p.490 occurs the following passage -

"Actual knowledge of the forgery is probably not essential. Lord Selborne, in M'Kenzie v. British Linen Bank Co. (1881), 6 App. Cas., at p.92, speaks of 'reasonable ground to believe' and the judgments in the American cases include convincing reasons for the conclusion, there arrived at, that, for this or a like purpose, a man must be treated as in possession of knowledge which, but for his own negligence, he could not have failed to acquire."

18. With the utmost respect to this argument, I felt I should hesitate long before I held, on such an uncertain and slender basis, that something less than actual knowledge of the forgeries would be sufficient to avail the Bank. It might be different in a case where a customer was what is sometimes called "wilfully blind" in that although his suspicions were aroused he deliberately omitted to make further enquiries because he wanted to remain in ignorance of the true state of affairs. In many such cases, of course, the Court will be likely to infer, as a matter of evidence, that the customer actually did know that the cheques were forged. It is of interest to note that the "adoption or ratification" point was not urged upon the New Zealand Court of Appeal in the National Bank of New Zealand case where the customer had been at least as careless as Wah Shing might be said to have been in the general course of carrying on their business, to prevent and detect the forgeries. I find it difficult to believe that the law would have developed as it has if the doctrine of what I might call "estoppel by acquiescence" could have been relied upon in the absence of actual knowledge by the customer of the forgeries.

19. It was for these reasons that at the conclusion of the trial I granted Wah Shing a declaration that the Bank was not entitled to debit their account with the amounts on any of the 38 forged cheques. For the same reasons I granted a declaration that the Bank was not entitled to debit Madam Lam's separate savings account with the sum of $36,382.17. Even if the Bank had the authority to combine the accounts in this way, their action would only have been justified if the Wah Shing account could rightly have been debited with the amounts of the forged cheques, and such turned out not to be the case. Nor, once the debits were to be cancelled, could the counterclaim for $828.39 interest by the Bank on the Wah Shing account stand.

20. At the time I announced my decision, I made an order for costs in favour of the plaintiffs on the successful claim and the unsuccessful counterclaim. Counsel undertook to consider the question of the appropriate interest to be awarded to reflect my decision and I gave liberty to apply in case agreement on this issue could not be reached within a reasonable time.

Representation:

Henry Litton, Q.C. and Benjamin Yu (Edmund W.H. Chow & Co.) for the Plaintiffs.

Martin Lee, Q.C. & Ronald Mayne (Woo & Woo) for the Defendant.