Commercial Bank of Australia Limited v Flannagan [1932] HCA 51

who received the cheque for collection made an inquiry of the agent as to

why he was paying the cheque into his own account and received the answer

" Because it includes my fees for work done." He accepted this explanation

without reference to the drawer. In an action by the drawer against the

Bank for conversion of the cheque and the proceeds thereof,

Held, that the Bank had not discharged the onus of proof which rested upon. it to show that in collecting the cheque it acted without negligence, and consequently that the Bank was not entitled to the protection afforded by

3 Decision of the Supreme Court of South Australia (Full Court): Commercial _ Bank of Australia Ltd. v. Flannagan, (1932) 8.A.8.R. 82, affirmed.

H.C. or A. Appway from the Supreme Court of South Australia. at The plaintiff, Patrick Joseph Flannagan, sued the defend 1 Commercia, Commercial Bank of Australia Ltd., for the conversion of a

pax or, drawn by the plaintiff for £435 9s. 9d., and, alternatively, \rp. payment of such sum as money received by the defendant for NNaGAN. yse of the plaintiff. The cheque was drawn by Flannagan upon "defendant: in the following form: "Pay State tax or bearer sum of four hundred and thirty-five pounds nine shillings ninepence," and was crossed generally and marked " not ne

The cheque was forwarded to one Coffey, a taxation expert, who | acting on behalf of the plaintiff in the preparation and settlement of income tax returns. The cheque was given to Coffey to pay thep tiff'sincome tax, and he had no authority to pay itinto hisown Coffey, however, who was and had for some time been a cus

of the defendant Bank, paid the cheque into his account et with that Bank, and the Bank collected or received pay

the amount of the cheque on Coffey's behalf and credited hit

his account current with the amount so received. Coffey, i fraudulently misappropriated the cheque and its proceeds. plaintiff thereupon brought this action against the Bank in Local Court of Adelaide seeking to make the Bank liable fo amount of the cheque so collected by it. The defendant substantially upon sec. 88 of the Bills of Exchange Act 1909, provides : - * (1) When a banker in good faith and without ne; receives payment for a customer of a cheque crossed genera specially to himself, and the customer has no title or a dt title thereto, the banker shall not incur any liability to the t owner of the cheque by reason only of having received such paym

(2) A banker receives payment of a crossed cheque for a within the meaning of this section, notwithstanding that he a

his customer's account with the amount of the cheque b receiving payment thereof." Coffey was an old customer of # Bank and was believed by both parties to be a man of good ch

The bank teller who received the cheque from Coffey said to "Why are you paying this cheque into your account? It is payable to you." Coffey replied : " It is the only way to clear cheque, because it has included my fees for work done." The

thereupon accepted the cheque. In fact the attorney of the owner of the cheque was in Adelaide and could have been communicated with by telephone, and there was time to make such inquiry before the cheque was collected. It also appeared that on many previous occasions Coffey had paid cheques drawn by clients for their taxes

• into his own account, and his actions had either been approved of by the clients on inquiry from them, or had not been questioned. A regulation of the Bank provided as follows : - '* Managers are . instructed that where any crossed cheque or cheque marked 'not negotiable ' bears on its face an indication of the purpose to which the drawer intended to apply it, it should not be credited to account other than the account so indicated without inquiries as the reason for it coming into other hands. Similarly, a ' not 'jiable ' cheque payable to other than the person depositing it , as a rule, not be received if there is anything on the face of _ the cheque, or in connection with the circumstances of the case, hich would suggest that the person lodging it has not a good title to it. This rule may, however, be relaxed in the case of clients of od character and repute." The plaintiff obtained judgment in favour in the Local Court of Adelaide, and the defendant appealed to the Supreme Court of South Australia - Murray C.J. and Richards J. (Piper J. dissenting) - which upheld the decision of the Local Court. on the ground that the Bank had not established that it was free from negligence: Commercial Bank of Australia Ltd. v. Flannagan (1). From that decision the Bank now appealed to the High Court.

Thomson K.C. (with him S. H. Lewis), for the appellant. The appellant is protected by sec. 88 of the Bills of Exchange Act 1909. There was no negligence on the part of the Bank in receiving and collecting the proceeds of this cheque, and the Bank acted in a teasonably prudent manner (Commissioners of the State Savings Bank of Victoria v. Permewan, Wright & Co. (2); London Bank of Australia Lid. v. Kendall (3) ). There was no duty imposed by law on the Bank to make any inquiry, but the bank official made an

(1) (1932) S.A.S.R. 87. (2) (1914) 19 C.L.R. 457, at p. 483. (3) (1920) 28 CLLR. 401, at p. 414.

'. his account. Regard must be had to the course of business ;

inquiry on receiving the cheque because it was within the the Bank that, where some purpose was indicated on the face cheque, the officer receiving it is required to make some ingui Coffey was a taxation expert and was so closely associated ¥ transaction that it was not unreasonable to pay the cheque ir

the necessary subdivision of labour in the Bank. The 1 "Pay State tax" differ from " Pay Commissioner of Taxat It was reasonable for the Bank to assume that Coffey, being a expert, would pay the money into his own account and then p to the Commissioner of Taxation. The only other precaution wl the Bank could have taken was to ring up the plaintiff or his atton The Court should have regard to the usual banking practice (Com sioners of the State Savings Bank of Victoria v. Permewan, Wi & Co. (1); Commissioners of Taxation v. English, Scott

Australian Bank (2); A. L. Underwood Ltd. v. Bank of Lio (3): Morison v. London County and Westminster Bank Ltd. Lloyds Bank v. Chartered Bank of India, Australia and Ci E. B. Savory & Co. v. Lloyds Bank (6); Midland Bank Reckitt (7); Gippsland and Northern Co-operative Co. v. Eng Scottish and Australian Bank Ltd. (8)). Permewan, Wright & Case (9) is distinguishable from the present case, as in that case indorsements were equivalent to a direction to pay a named paj The Bank could not have communicated with the plaintiff the risk of casting some reflection upon Coffey's financial sta [Counsel also referred to Paget's Law of Banking, 4th ed., pp. and Lloyds Bank v. Chartered Bank of India, Australia and @

There must be something ania shows that the markedly irregular. The appellant has to show that it was reaso ably careful in arriving at the conclusion that the person paj

(1) (1914) 19 C.L.R., at pp. 478, 482, (6) (1932) 2 K.B, 122.

483. (7) (1932) 48 T.L.R. 271. (2) (1920) A.C. 683, at pp. 688, 689. (8) (1922) V.L.R. 670; 44 A.L.T. (3) (1924) 1 KB. 775. (9) (1914) 19 C.LR. 457. (4) (1914) 3 K.B. 356, at pp. 368, 373. _(10) (1929) 1 K.B., at pp. 56, 59, 6 (5) (1929) 1 K.B, 40. 70, 72.

in the cheque had authority to pay it into the Bank. The question 'is: was it a reasonable belief on the facts that were known ? (See Gippsland and Northern Co-operative Co. vy. English, Scottish and Australian Bank (1); E. B. Savory & Co. v. Lloyds Bank (2).) [Srarke J. referred to London and Montrose Shipbuilding and Repairing Co. v. Barclays Bank Ltd. (3).] If the appellant shows that according to ordinary banking practice the Bank was not negligent, that is sufficient to discharge the onus of proof. The indorsement on the cheque in question indicates that e payee is to get the cheque cashed and pay the taxes with the is, but an indorsement such as " Pay taxes only " would the subject matter.

Tigertwood K.C. (with him Wright), for the respondent. The uestion is whether the Bank did all that a reasonable banker d do to protect the owner of the cheque. Several cheques of persons having reference to tax were paid into this account ithout any evidence of misappropriation, but as there was no nnection of these cheques with the respondent they were inadmis-

sible and, for aught that appeared, they may have been improperly ; paid in. The practice of paying tax to the Department by one cheque covering numerous assessments was an irregularity which should have awakened the Bank. The circumstances pointed to the reasonable possibility of the cheque being used in breach of the drawer's mandate. The appellant's instructions to its officers

indicate the irregularity of accepting cheques such as the present without inquiry. The disclosure of the purpose for which the _ cheque is given is sufficient warning according to Permewan, | Wright & Co.'s Case (4), and Commissioners of Taxation v. English, Scottish and Australian Bank (5). The appellant was negligent in | not referring the matter to the drawer to ascertain whether Coffey _ had or had not authority to pay the cheque into his own account. _ There was no serious exercise of judgment on the appellant's part

_ in making inquiries. On its face this cheque belonged to the

I) (1922) V.LLR., 670; 44 A.L.T. 34. (3) (1925)31 Com. Cas. 67, at pp. 72, 73. 2) (1982) 2K-B.'122. (4) (1914) 19 C.L.R. 457. (5) (1920) A.C, 683,

respondent and not to Coffey and this fact put the Bank upon i inquiry. The only way that the Bank could escape liability

a cheque such as this is presented by an agent of the owner is: to have made full inquiries. The crossing " not negotiable" is circumstance to be taken into consideration. [Counsel also ref to Slingsby v. District Bank Ltd. (1); Lloyds Bank v. Chartered a of India, Australia and China (2); Mason v. Savings Bank of S Australia (3); Commissioners of Taxation v. English, Scot Australian Bank (4).]

Thomson K.C., in reply. In all the circumstances of the ¢

the Bank had not been negligent. If the Bank lives up to standard of a prudent banker the statute gives it protection. i

Gavan Durry C.J. anp Srarke J. A cheque was drawn one Flannagan upon his banker in the following form: " Pay 8 tax or bearer the sum of four hundred and thirty-five pou nine shillings and ninepence," and it was crossed generally marked not negotiable. The cheque was forwarded to one ( who was acting on behalf of Flannagan in the preparation settlement of his income tax returns. The cheque was gi Coffey to pay Flannagan's income tax, and he had no authority t pay it into his own account. Coffey, however, who was a for some time been a customer of the Commercial Bank of At Ltd., paid the cheque into his account current with that and the Bank collected or received payment of the amount 0 cheque on Coffey's behalf, and credited him with the amour received in his account current. Coffey, in truth, fraudul misappropriated the cheque and its proceeds. The pres respondent, Flannagan, brought an action in the Local Adelaide seeking to make the Bank liable for the amount 0 cheque so collected by it. He obtained a decision in his fay

) (1932) 1 K.B, 544, at p. 556. (3) (1925) S.A.S.R 198. (

Sy 1929) | K.B., at pp. 60, 78, 79. (4) (1920) A.C., at p. 688

and the Bank appealed, without success, to the Supreme Court of H.C. or A.

The Bank relies upon the provisions of sec. 88 of the Bills of Comme:

| Brehange Act 1909: "Where a banker in good faith and without arcrarts

negligence receives payment for a customer of a cheque crossed

generally or specially to himself, and the customer has no title or FLANNAGAN, a defective title thereto, the banker shall not incur any liability to Gavan Duty

the true owner of the cheque by reason only of having received Ske J

_ such payment." The section has been the subject of many decisions. a it is not disputed, in the present case, that the Bank, in collecting

• the cheque for its customer, acted in good faith, and the only question "for our consideration is: Did the Bank act without negligence ? 'It is for the Bank to establish affirmatively that it did so act. : The words " without negligence " do not mean without a breach of
• duty on the part of the Bank towards itself or towards the person _ whoisits customer. The phrase means " without want of reasonable "care in reference to the interests of the true owner" (H. B. Savory & Co. v. Lloyds Bank (1); Commissioners of Taxation v. English, ' Scottish and Australian Bank (2); London and Montrose &c. Co. v. Barclays Bank Ltd. (3) ). Whether a banker in any given case has acted without negligence "is necessarily a question of fact _Itis . . . impossible to lay down rules or statements which will

determine what is negligence and what is not. Each case must be determined on its own circumstances " (Commissioners of Taxation y. English, Scottish and Australian Bank: (4) ). "If there is in the appearance and details of the cheque, the nature of the persons dealing with it . . . anything unusual or suspicious, and Suggesting the necessity for inquiry" in the interests of the true owner, then it is for the Bank to exercise due care for the protection of those interests (London and Montrose &c. Co. v. Barclays Bank Lid. (5) ).

In the present case, the cheque is drawn "Pay State tax or bearer." It is for a fairly large amount, and indicates on its face that it was drawn for the purpose of paying State tax. It is not in accordance with the ordinary course of business that a cheque so

(1) (1932) 2 K.B., at p. 130. (3) (1925) 31 Com. Cas. 67. (2) (1920) A.C. 683. (4) (1920) A.C, at pp. 688, 689. (5) (1925) 31 Com, Cas., at p. 73.

Ww Commerctat. BANK OF AUSTRALIA Lrp. . FLANNAGAN.

private individual. When Coffey paid this cheque into his account at the Bank, the receiving officer noted that it was mar

it to be for State income tax. A general instruction had been to officers of the Bank that where any crossed cheque, or marked not negotiable, bore on its face an indication of the puy to which the drawer intended to apply it, then the cheque ho not be credited to an account other than the account so indies without inquiries as to the reason for its coming into other ha Similarly, a "not negotiable" cheque payable to other than 1 person depositing it should not, as a rule. be received if there anything on the cheque or in connection with the circumstan the case which would suggest that the person lodging it had not « good title to it. But the instruction might be relaxed in the ca clients of good character and repute. As a matter of prud and of obedience no doubt to his general instructions, the officer promptly challenged the cheque. He said to Coffey: " are you paying this cheque into your account? It is not payabl to you." Coffey replied: "It is the only way to clear the ch because it includes my fees for work done." Coffey's statem that he was paying into his own private account a cheque dray for a sum of money intended, in great part, to pay income tax: to the State, cannot be regarded as disclosing a transaction in tl ordinary course of business; though a similar cheque had collected by the Bank for Coffey after an identical explanation months previously, and no complaint had come from the The statement, moreover, was not true. The receiving officer the cheque on the faith of Coffey's statement, without making further inquiry, and the Bank collected it on Coffey's account. -

Both the Special Magistrate and the majority of the learned Jud of the Supreme Court thought the Bank lacking in care and cau in these circumstances; and we agree with them. The risk apparent. Experience has shown that there is a grave Ti misappropriation if managers, agents or servants pay other p money into their own private accounts. But the Bank, officers, took the risk. It accepted Coffey's statement, and as

his authority to pay the cheque into his account without the slightest inquiry, though he was the person against whom the true owner required protection. If it were too delicate a matter to make _ inquiries from the drawer of the cheque, the Bank might have if declined the responsibility of collecting it unless Coffey produced some satisfactory authority or consent from the drawer to the cheque | passing into his private account, or it might have procured an ; alteration of the cheque, as was insisted upon by another Bank on ' another occasion. The Bank has not affirmatively established that 4 acted without negligence in the circumstances of the case, and ~ the appeal should, therefore, be dismissed. Dixon J. I agree. The explanation which Coffey gave to the

• teller in answer to the question why, although the cheque was not payable to him, he was paying it into his own account, disclosed i that the greater part at least of the proceeds of the cheque should _ be applied in discharging his client's liability to the Commissioner _ of Taxation of South Australia. The form in which the cheque was drawn was consistent with the hypothesis that it was a reimburse- 'ment to him of State tax which he had paid out of his own moneys

| on behalf of his client. The explanation excluded this hypothesis ;

and made it clear that the words "State tax" after the word "Pay" had been written in reference to an undischarged liability to the Commissioner. In these circumstances Coffey's title to obtain payment of the cheque rested entirely upon the correctness _ of his assertion that his fees were included in the amount for which it was drawn. If this statement was wrong, it was almost certain that the property in the cheque remained in the drawer. Thus the _ identity was clearly established of the possible true owner for the protection of whose interests the Bank was bound to take reasonable care. The nature of the danger, whether great or small, to which his interests were exposed was not in doubt. The question, one of fact, is whether the failure to take further precautions, by inquiry or otherwise, for the protection of the drawer amounted in these circumstances to a want of proper care for the interests of a possible tre owner. The fate of those interests was allowed to depend entirely upon the honesty and veracity of the Bank's customer.

But, although he was in fact thoroughly dishonest, he was at th time unsuspected. Why, it is asked, should not the Bank el itself with an unqualified acceptance of his explanation? He

inherently absurd in his statement. His occupation was a taxpayer's representative. He drew many cheques upon | account, which although payable to a number, bore upon

when presented for payment unmistakable evidence that they I been given in payment of taxes. Did not this show that it practice to pay his clients' taxes with his cheque, placing cheques to his own credit ? More than two months before, he paid in a crossed cheque marked " not negotiable " drawn by th plaintiff's attorney "Pay tax Federal or Bearer." He had g the same explanation why he did so and no complaint had been made in respect of the transaction. Cheques of other drawer more or less in the same form, had been paid in and as yet no tro had arisen. His account was active and suggested a subs business. Did not all these circumstances justify a reliance up the account of the cheque given by Coffey? Such a view situation is open to the criticism that it supposes a close acquai with the dealings of Coffey, but not too close. For a close ¥ of the operations upon his account would have suggested to doubt the honesty of his dealings in respect of taxation mo But, in any case, these contentions are answered by the charé of the danger which care must be taken to avert and by the n of the banking transaction itself. In the first place, the it stances made it evident that if Coffey were a dishonest agent might, by means of the Bank, act in fraud of his principal collected the cheque. In the second place, it cannot be in ordinary course of business for a cheque, so drawn and marked as that in question, to include the fees of a taxation agent. To! y exclusively upon the agent's own explanation of his use of such cheque is to encounter the risk, not to exercise care to avoid it,

Solicitors for the appellant, Varley, Evan, Thomson & Butt Solicitors for the respondent, Baker, MeHwin, igertu Millhouse.