National Australia Bank Ltd v Nemur Varity Pty Ltd [2002] VSCA 18

National Australia Bank Ltd v Nemur Varity Pty Ltd [2002] VSCA 18 - VSCA 2002 case summary — Zoe

[52]

Obviously, for the claim to succeed, it was necessary, as the judge said (in paras.178 and 200), for him to be satisfied[14] that default on the part of the Bank was at least a cause of the loss sued for, which was more particularly the loss of the business of certain clients of Nemur Varity whose premiums were the subject of the NAB cheques and the TT cheque. The relevant defaults of the defendant, his Honour said (para.201), were "the conversion of the NAB cheques by the Bank, its failure to handle those cheques as it should have been done and its mishandling of the teletransfer", all of which resulted in the diversion of those premiums away from the intended insurer RCA and so an absence of insurance for those clients. The judge found that in consequence of the Bank's conduct Nemur Varity was "in each case left with the [erroneous] belief that the clients whose premiums had been represented by the cheques were insured with RCA" (para.202) and so took no steps to arrange real insurance for them or to tell them they were uninsured; and that "Jarman learned of the true situation on 9 July 1990" (para.203) and immediately informed the clients whose insurances fell due for renewal after that date that they were uninsured. In their case only his Honour considered it "very reasonable to infer, as a generality, that the plaintiff's communication of the true situation was a cause of those clients abandoning dealings with the plaintiff" (para.204), for each then knew that it was uninsured, had never been insured and had paid a premium for which it had got nothing. His Honour was of opinion that "loss of business occurring in those circumstances was a loss caused by the default of the defendant, whether the matter be looked at in contract or tort" (para.206). Relevantly, that was because, as the judge saw it, the acts and omissions of the Bank served to conceal from Nemur Varity what otherwise could have been discovered, had the bank acted properly and in particular made appropriate inquiry. In elaborating his reasons his Honour said:

[59]

Causation and remoteness of damage were the major issues argued on this appeal. As both counsel informed us and is apparent from his Honour's reasons, they were argued at some length before his Honour. With regard to causation, although counsel for the Bank challenged on appeal much of his Honour's detailed reasoning (referred to only briefly above) about individual customers of Nemur Varity in respect of which damages were claimed, counsel submitted, on a more general level [16] and at a logically anterior point, that the loss of clients was not, as a matter of common sense, caused by the conversion or by the breach of duty in relation to the NAB cheques or the telegraphic transfer. He submitted that his Honour's approach on causation was faulty because he had applied a "but for" test and no more, instead of common sense, the majority of the High Court having in March v. E.&M.H. Stramare Pty. Ltd.[17] rejected the "but for" test as the sole criterion of causation.[18] It was submitted that there was no evidence to support his Honour's inference that the relevant clients left Nemur Varity because of being told that they were uninsured: no client whose business was allegedly lost gave evidence that it left Nemur Varity for that reason. Counsel submitted that none of the Bank's defaults was a cause of clients' being uninsured or being unaware of that fact. Rather, those things occurred because Nemur Varity had chosen to deal with ANI as supposed agent for RCA and as able to bind it. (Treating ANI simply as a non-broking intermediary, as his Honour did, the argument would be that the two things happened because Nemur Varity chose to try to deal with RCA through ANI as an intermediary). Counsel further contended that it was mere speculation whether inquiry of ANI or IIE before the latter's account was credited and Nemur Varity's account debited would have disclosed to Nemur Varity misconduct on the part of either ANI or IIE. Thus it was urged that, had those presenting the NAB cheques for payment been asked questions by staff of the North Balwyn branch, Charge would no doubt have provided "appropriate responses". Counsel, relying on the expert evidence of Mr. Harvey and the terms of the Bank's internal manual, emphasized that where a third party cheque is presented for deposit, whilst inquiry may be directed by the collecting bank not only to the person presenting the cheque but also, if it wishes to establish title, to the payee, inquiry is not directed to the drawer,[19] and so, counsel said, relevant inquiry would here have been made of those perpetrating the fraud, not the victim. It was further argued that, even if it had come to Nemur Varity's notice that the NAB cheques were not being deposited to an RCA account, it did not follow that that would have revealed Charge's fraud, for, as his Honour found,[20] Jarman was "gullible" and "readily accepted explanations from Charge in late 1989 when a number of matters of concern arose [and] was perhaps over-ready to accept such explanations," so that, the argument went, it was reasonable to infer that Charge would have provided a plausible explanation to Jarman. It was noteworthy that there was no evidence that any insurance claim by a client of Nemur Varity supposedly insured by RCA through ANI had not (eventually) been met. Of course, several of those submissions are not apposite on the facts to the telegraphic transfer where the mistake lay in the lack of correspondence between name and account number in the very details given to the Bank by or on behalf of the drawer of the TT cheque.

[61]

The issue is whether his Honour was correct in finding that the defaults of the Bank were a cause of the loss of the business of the nine clients in respect of which damages were awarded. The resolution of that issue is by no means easy, requiring the application of a very general test frequently said to be impressionistic and to permit of value judgments. I have, however, come to the conclusion that his Honour erred in his finding as to causation. His Honour's reasoning (as well as Mr. Williams' argument in support of it) was largely, though perhaps not entirely, of the "but for" kind. Thus, prominent in it were expressions such as "had the conversion of the NAB cheques not taken place" (para.206) and "had the defendant not been in default ..." (para.208). His Honour spoke, too, of "the occasion[21] for clients deserting the plaintiff" (para.208, emphasis added). In my opinion, having regard to the nature of the cause propounded by Nemur Varity and the fraudulent activity forming the context in which the Bank acted or failed to act, satisfaction of a "but for" test, whilst not irrelevant, is by itself insufficient to establish causation here. Further, I consider Mr. Karkar was correct in his submission that the cause of the relevant clients' lack of insurance and of the belief by Nemur Varity and its relevant clients that the latter had insurance cover was that Nemur Varity had chosen to deal with ANI as supposed agent for RCA and as able to bind it (or at any rate to deal with RCA through ANI). The cause in fact of Nemur Varity's loss was the fraud**.** The fraud against which the Bank's duties were designed to afford protection was fraud in the application of the cheques, not all fraud. Overall to my mind, when one stands back and reviews the decision on causation against the Bank's defaults, a finding or inference that one or more of the defaults was a cause of the loss of business of the clients concerned is counter-intuitive and not in accord with common sense. As his Honour recognised, it is not enough that Nemur Varity lost business as a result of what he called "the RCA fiasco". For my part, however, I do not consider that Nemur Varity proved more than that. I would accordingly uphold the challenge relating to causation.

[69]

In answering that question the court has to assume, though it be contrary to the fact, that the parties had in mind the breach that occurred.[40] As in tort, so in contract it is sufficient that the parties should reasonably have contemplated loss or damage of the kind suffered: Koufos[41]; Alexander v. Cambridge Credit Corporation[42]and cases there cited; Greig & Davis, The Law of Contract[43]; and Chitty on Contracts[44]. The House of Lords in Koufos made it clear that the test for remoteness in tort is more liberal than in contract[45], but the members of the House used slightly different formulations to express the degree of probability of the occurrence of the loss which is to be reasonably contemplated, such as not unlikely (Lord Reid), liable to be or at least not unlikely to be (Lord Morris of Borth-y-Gest), liable to be (Lord Hodson) and a serious possibility or real danger (Lord Pearce and Lord Upjohn).[46] The High Court has not, according to my review of its decisions[47], definitively chosen one of those formulations over the others, though McHugh, J.A., when a member of the New South Wales Court of Appeal, expressed a preference for Lord Reid's formulation. [48] I shall for simplicity use it. However, as Walsh, J. pointed out in Wenham v. Ella[49], a contract case, the rules as to remoteness are not "rigid rules of universal application", but rather prima facie rules which may be displaced or modified as necessary to achieve an appropriately balanced result. Scrutton, L.J. (dissenting) in The Arpad[50], anticipating Koufos, observed that the measure of damages in contract and that in tort are not the same: in contract one looks at the date of the contract to see what was contemplated by both parties[51] and of what there was notice, whilst in tort one looks at the date of the tort, when, his Lordship said, notice to the tortfeasor was irrelevant. Later cases show, of course, that the test in tort is that of the reasonable person, whether that characteristic is transferred to the tortfeasor or treated independently, and that circumstances existing at the time of breach and then known can be regarded.

[81]

I come now to consider whether either of the kinds of damages awarded for consequential loss, namely, net loss of business income and the face value of the ANI cheque, was, as the Bank argued, too remote. I commence with the contractual claims, which, it will be recalled, were for breach of the duty of reasonable care and skill in relation to paying the NAB cheques and also in relation to the telegraphic transfer. In the latter case the breach was really a failure to carry out the mandate or instruction given by the customer to the Bank for the telegraphic transmission of the funds represented by the TT cheque, to which the contract between banker and customer was basal. Hadley v. Baxendale and subsequent authorities show that the contemplation of the parties that falls for consideration is contemplation as at the date of the making of the contract. In this case, however, a particular difficulty arises because the contract establishing the relationship of banker and customer between the Bank and Nemur Varity was made in October 1986, whereas the breaches occurred in 1989 (and the losses compensated extend to 30 June 2002). Even if the span between the date of contracting and the breaches not be thought remarkable, the nature of the contract was such that, when made, it was, like other similar contracts, capable of lasting for many years, though it might have been varied or replaced by a formal written contract, at any rate if financial facilities were sought and granted. During the subsistence of such a contract many changes in the customer's circumstances might occur. For instance, the nature of its business could change entirely. The contract was one to be performed from time to time and in the circumstances it seems appropriate to take into account the knowledge that the Bank acquired in the course of executing the contract. This can be done consistently with principle by treating the continuing or standing contract made in October 1986 as engaged and given content by instructions from time to time from the customer to the Bank and in particular by written orders to pay (that is, cheques) or to transmit funds telegraphically. The question, then, becomes whether at the times when the NAB cheques were presented and the application for telegraphic transfer was made the parties, or more particularly the Bank as the subsequent defaulting party, should reasonably, on the information then available, have contemplated that loss of the kind in question would probably occur (in the sense that it was not unlikely to occur) as a result of a breach of the contract and in particular of the contractual duty of care in relation to the payment of Nemur Varity's cheques and the carrying out of its mandate for the telegraphic transfer.

[98]

After much reflection, I am not satisfied that the test for remoteness of damage in conversion is whether the loss claimed is of such a kind as was reasonably foreseeable. I say that for the following reasons. It is clear on the authorities that a remoteness test of reasonable foreseeability does not apply to all torts. So far as conversion is concerned, none of the cases on conversion discussed above is binding on this Court and there is on analysis little authority directly supporting that test. Kuwait Airways is not an authority, since the Court of Appeal proceeded on a concession by counsel. The analysis by Aikens, J. at first instance in that case of the judgments in Saleslease, on which counsel's concession appears to have been based, is, in my respectful opinion, incorrect. For the only judgment which to my mind could be interpreted as applying reasonable foreseeability was that of Waller, L.J., who considered[108] whether the defendant could have anticipated[109], or could reasonably have anticipated, the consequential loss in the light of the knowledge of and notice to the defendant. But his Lordship's remarks could, I think, as readily be treated as adopting a Hadley v. Baxendale test. Butler-Sloss, L.J. at any rate did not use reasonable foreseeability but rather spoke[110] in terms consistent with the dictum in France v. Gaudet, for she said that a consequential loss which was special to the circumstances of the particular plaintiff and which was not known to the tortfeasor was too remote. Although Schiemann, L.J. dissented on the facts in relation to remoteness, it can at least be said that he did not adopt reasonable foreseeability, for he considered[111] that the defendant was apprised of the particular use of the property which the plaintiffs would be deprived if he persisted in wrongfully refusing to release the goods and moreover was apprised of the income which they would obtain from that use. One is left, then, so far as I can see, with only the fact that King, C.J. applied reasonable foreseeability in Harrisons Group Holdings; but, despite the great respect to which any judgment of his Honour is entitled, the point as to the test for remoteness did not command a reasoned expression of view by his Honour. Moreover, the defendant had actual knowledge, so that, whatever the test, it was satisfied. The concession by counsel for the plaintiff in Kuwait Airways, on which the Court of Appeal acted, was based according to their Lordships not only on Saleslease but also upon The Arpad. I have to say, with respect, that I can find nothing in the majority judgments in that case which indicates that the test in conversion is one of reasonable foreseeability. Rather, their Lordships treated the rule in contract as applying_,_ Greer, L.J. in particular saying[112] that only "the first rule" in Hadley v. Baxendale fell for consideration. Otherwise notice to the defendant of the particular facts was required. It might be said that Cambridge Water Co. supports the view that reasonable foreseeability is the test for conversion, since conversion, like the principle in Rylands v. Fletcher, is a tort of strict liability; but, as I have already indicated, reference to Lord Goff's reasoning shows that the decision in that case is confined to the principle in Rylands v. Fletcher and (as a necessary step in the reasoning concerning that principle) nuisance.

[102]

I now turn to apply that test. Counsel for Nemur Varity indicated in argument that, in the event that that test was held applicable, he relied on the matters enumerated in the answer he had earlier given to a question from the Bench as to why it was reasonably foreseeable that Nemur Varity would lose customers or would continue dealing with the fraudster (and draw the ANI cheque). Counsel had relied on four special features about the NAB cheques which were known to the Bank and which, in his submission, constituted "special knowledge" on its part sufficient to justify the consequential damages awarded. First - and perhaps this was only implicit in his submissions but it was fundamental - the drawer of the cheques was an insurance broker. Secondly, they were made payable to an insurance company or, it may be, a reinsurance company. Thirdly, they were drawn on "Insurance Broking Account", a special purpose account, marketed indeed by the Bank and existing for the purpose of the broker's holding sums for premiums to be forwarded to an insurer (and sums received from an insurer on account of insured or intended insured). In that regard counsel cited ss.26(3) and 27(1) of the Insurance (Agents and Brokers) Act 1984 (Cth) ("the Brokers Act") as in force at the relevant time[117]. Fourthly, the cheques were presented for collection by a third party, that is, a person other than the named payee. In that regard counsel referred to the part of the Bank's manual that instructed staff that, when that occurred, inquiry of the person presenting the cheque for collection was called for in order that the Bank might be satisfied that the person was entitled to do so.[118] In the light of all that knowledge, counsel argued, the Bank should have known that the cheques represented, or were very likely to represent, premiums for insurance for the benefit of clients of the broker, so that the Bank would think to itself, as indeed, he said, his Honour thought, that, if it allowed the cheques to be banked, the premiums might never reach the insurer but be wrongly misappropriated by the depositor, with the result that clients would fail to have the benefit of insurance and there would be difficulties between the broker and its clients.

[103]

In response, Mr. Karkar in his reply for the Bank accepted that the facts relied on were correct except that the cheques were payable to a reinsurer or bearer. He went on , however, to refer to other facts known to the Bank. First, the cheques were presented for payment to the credit of an account of a company named "International Insurance Exchange Pty. Ltd.", which suggested that it was an insurance intermediary, and were collected for the credit of that account. Secondly, that account was itself designated a "Premium Trust Account", as shown by Exhibit P15, to which he took us. Thirdly, the presentation of third party cheques for collection is scarcely uncommon.[119] Mr. Karkar emphasised not only that fact but also that the cheques were bearer cheques and that a trust account is often used for the very purpose of the collection of third party cheques, as the person presenting such a cheque for payment, such as a solicitor or estate agent, is not the beneficial owner and merely holds the proceeds for another.[120] Accordingly, there was nothing suspicious and the Bank was entitled both to assume that the cheques came into its customer's hands in a perfectly normal course and not to make inquiries[121]. It was implicit in this, though not, I think, expressly stated, that it could not be said that, in the ordinary course, premium payments from a customer might not be received by one broker or intermediary and paid to another broker or intermediary while in transit to the insurer, particularly if that insurer was supposed to be overseas. It was fundamental to Nemur Varity's argument on remoteness, said Mr. Karkar, that the Bank should suspect that its customer was or might be a thief. Finally (though this was not the order in which he himself made the points), Mr. Karkar drew attention to the experiential truth concerning bankers to be found in statements by three eminent English judges to the effect that trust, not distrust, is the basis of a bank's dealings with its customers.

At a glance

Court

Decision date

Before

Source

Judgment (211 paragraphs)

Parties

Legislation Cited (2)