National Commercial Banking Corporation of Australia Ltd v Batty

National Commercial Banking Corporation of Australia Ltd v Batty - [1986] HCA 21 - HCA 1975 case summary — Zoe

[4]

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. If, in the present case, the firm had been entitled to the cheques, the position would have been that the Bank received payment from the paying bank as agent for the firm, and the proceeds of the cheques, when collected, would have been the firm's moneys; once they were credited to the firm's account the Bank would have become the debtor of the firm. Thereafter the proceeds would have become an asset of the Bank and the firm would have had a right to repayment on demand (Croton v. The Queen [15] ) but we are not concerned with the position after the moneys were credited to the account. In fact the cheques were the property of the company which could have sued the Bank for conversion (as it did) or could have elected to sue the Bank for money had and received. In these circumstances the money credited to the firm's account would appear to have been the money of the company and not the money of the Bank. No doubt once the company obtained judgment against the Bank, and the judgment was satisfied, the property in the cheques would pass to the Bank: Salmond on Torts, 18th ed. (1981), pp. 527-528. Obviously there was neither judgment nor satisfaction at the time when the proceeds of the cheques were paid to the credit of the firm's account. The remedy of the Bank, in the events which happened, was to claim to be indemnified for the loss occasioned to it by the false representation impliedly made by Mr. Davis when he deposited the cheques. It has of course made such a claim, but for reasons already given cannot succeed against Mr. Batty. For these reasons it appears difficult to contend that the moneys credited to the account were had and received to the use of the Bank. However, since this matter was not fully explored I shall proceed to consider whether Mr. Batty is liable, on the assumption that the moneys so credited were moneys of the Bank. 1. [1903] A.C. 240, at pp. 244-245. 2. [1921] 3 K.B. 110, at p. 127. 3. (1967) 117 C.L.R. 326, at p. 330.

[9]

Marsh v. Keating was considered in Jacobs v. Morris [20] . In that case the London agent of Louis Jacobs, a Melbourne merchant, purporting to act on behalf of Jacobs under a power of attorney, borrowed money from Messrs Morris and paid it into Jacobs' London account and then misapplied it, without Jacobs' knowledge. Jacobs was held not to be liable to Messrs Morris. Farwell J., at first instance, following Marsh v. Keating, said that for Messrs Morris to succeed it was necessary to show that Jacobs knew or had means of knowing that the money had been paid into his account [21] . He regarded this test as the application of those equitable principles to which Lord Mansfield referred in Moses v. Macferlan [22] , and went on to consider whether "ex aequo et bono Messrs. Morris ought to succeed". He held that they should not because the power of attorney, which showed that the agent had no power to borrow, had been produced to them and they had not read it, and because Jacobs did not know of, or benefit from, the borrowing [23] . In the Court of Appeal, the judgment of Farwell J. was upheld. Vaughan Williams L.J. based his conclusion on the estoppel arising against Messrs Morris by reason that they had constructive notice, when they lent the money, that the agent had no authority to borrow it [24] . He doubted [24] whether Marsh v. Keating decided that "ignorance and want of means of knowledge will exonerate a person through whose account a sum of money has passed from responsibility" and said that the ignorance in such a case as Marsh v. Keating "seems evidence of negligence, or of the wide limits of actual authority given to an agent appointed by the principal to deal with strangers" [25] . Stirling L.J. also considered that the cause of the loss was the "neglect of ordinary business precautions" by Messrs Morris, but he went on to agree with the view taken by Farwell J. of the decision in Jacobs v. Morris [26] . Cozens-Hardy L.J. expressed agreement with Farwell J.'s judgment, but added that it would not be just to hold Jacobs liable for an act done by his attorney beyond the scope of his authority in favour of Messrs Morris, who knew the limits of the authority [27] . The case does not decide that means of knowledge would be enough to render liable a person into whose account money has been paid in circumstances like the present.

[13]

Although Dixon J. did not need to express a concluded opinion on this question, in my respectful opinion the solution which he tentatively suggested is the correct one. It is quite unnecessary for present purposes to discuss the theoretical basis of the action for money had and received. Whether the action is based on an implied promise to pay, or on a principle designed to prevent unjust enrichment, the emphasis on justice and equity in both old and modern authority on this subject supports the view that the action will not lie unless the defendant in justice and equity ought to pay the money to the plaintiff: see Moses v. Macferlan [33] ; Campbell v. Kitchen & Sons Ltd. and Brisbane Soap Co. Ltd. [34] ; R. v. Brown [35] ; Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [36] ; Watney v. Mass [37] ; Fischler v. Administrator of Roumanian Property [38] . Where, because of the action of a servant or agent acting outside the scope of his authority, or for that matter because of the action of a complete stranger, money has been paid into the account of the defendant, who has technically received it, although he is quite unaware of that fact, and the money is then misappropriated, still without the knowledge or intervention of the defendant, there seems to be no reason in justice or equity why the defendant should be answerable for the money simply because theoretically he had the means of knowing that the money was in the account. In principle, in those circumstances, the defendant ought not to be liable unless, before the money was misappropriated, he knew or ought to have known that he had possession or control of it. In other words, where the defendant has not had the benefit of the money, has not played any part in disposing of it and was ignorant of the fact that it was theoretically under his control, he should not be liable in the absence of fault on his part. That conclusion is not inconsistent with the words of Park J. in Marsh v. Keating or with the actual decision in Jacobs v. Morris and is supported by the remarks of Dixon J. in James v. Oxley. In the present case Mr. Batty was not guilty of any want of ordinary diligence for failing to become aware that the money was paid into the account. He in fact discovered some time after the event what had occurred, but that was too late to enable him to prevent the misappropriation. From the time when the money was credited to the account until the time when it was withdrawn (some time during February 1976) Mr. Batty neither knew nor ought to have known that he had (technically) possession or control of it. In these circumstances he is not liable to the Bank as for money had and received.

[21]

Mr. Batty became a partner in Mr. Davis' accountancy practice on 1 January 1975. They carried on their practice under the firm name Davis Batty & Co. Mr. Batty described the practice as "basically taxation work with a little bit of auditing, investment and financial advice and some secretarial work". The practice was not large. Mr. Davis became a director of Robert Bushby Pty. Ltd. (which I shall call "Bushby") and had its authority to receive on its behalf two cheques drawn respectively by I.A.C. and Esanda. The I.A.C. cheque was drawn in favour of "Robert Bushby Pty. Limited or order"; the Esanda cheque in favour of "Robert Bushby Pty. Ltd. or bearer". The former was crossed "not negotiable account payee"; the latter was crossed "not negotiable". Mr. Davis indorsed the former cheque by writing on the reverse "Robert Bushby Pty. Ltd. A.A. Davis (Director)". He had no authority to do so. Bushby was and remained the true owner of the cheques. On 21 January 1976, without the owner's authority, Mr. Davis deposited the cheques for collection by the appellant Bank for the credit of the Davis Batty & Co. Trust Account. The Bank presented the cheques for payment and received the proceeds. The proceeds were credited to the firm's trust account. Until the middle or latter half of 1976, Mr. Batty had no knowledge of Mr. Davis' possession of Bushby's cheques, his depositing them with the Bank to the credit of the trust account or the Bank's crediting of the trust account with the proceeds collected. By that time, Mr. Davis had withdrawn from the trust account and had misappropriated an amount representing the whole of the proceeds of the cheques. Subsequently, the partnership was dissolved. In December 1976, the trust account was closed. At the trial, the transactions on the account after the collection of Bushby's cheques were not investigated, except to show that amounts representing the proceeds of the cheques had been withdrawn from the account by February 1976. It was not established that the firm or Mr. Batty personally had derived any benefit from the proceeds of the cheques credited to the trust account. Nor was it established that Mr. Batty did anything to ratify Mr. Davis' acts in depositing Bushby's cheques to the credit of the trust account and in withdrawing the amounts representing the proceeds of the cheques. Mr. Davis died in August 1981, shortly after the present action was commenced. Bushby recovered a judgment against the Bank in an amount equivalent to the face value of the cheques together with interest.

[29]

A bank which credits a customer's account with the proceeds of a collected cheque has both accounted to the customer for the proceeds and borrowed the proceeds from the customer: per Scrutton L.J. in Underwood [53] ; Joachimson v. Swiss Bank Corporation [54] . The borrowing results in a credit item in favour of the customer in the account between the bank and its customer. The debt represented by such an item cannot exist unless the customer has authorized the bank to collect the cheque on behalf of the customer, to pay the proceeds of the collected cheque to and to borrow the proceeds from the customer, or the customer knows and acquiesces in the bank's doing so. Mr. Batty had no knowledge of the Bank's collection of the cheques and crediting of the trust account. The firm did not do anything to accept the credit and it derived no benefit from it. It is not liable for money had and received to the use of the Bank merely by reason of the posting of a credit entry in a statement of account. As between the firm and the Bank, the firm became the Bank's creditor in respect of the proceeds of Bushby's cheques only if Mr. Davis had the firm's actual or ostensible authority to authorize the Bank to collect the cheques and to pay the proceeds to and borrow the proceeds from the firm. By depositing the cheques, Mr. Davis purported to authorize the Bank to take those steps on behalf of the firm, and the proposed claim must fail unless the firm is bound by that purported authorization. Therefore the primary question for decision in relation to the proposed claim is whether Mr. Davis had or, as between the firm and the Bank, he is to be taken to have had, the firm's authority to deposit the cheques to the credit of the trust account. There is no evidence of any special authority having been given by the firm to Mr. Davis, nor is there evidence of any representation of such an authority having been made to the Bank, either by Mr. Davis or by Mr. Batty. Mr. Davis had no wider authority than the ordinary authority he had as a partner.

[31]

By the first limb of s. 5 of the Partnership Act, "every partner is an agent of the firm and his other partners for the purpose of the business of the partnership". By the second limb, the authority of a partner to bind the firm extends to the doing of an act for carrying on in the usual way the business of the firm unless the partner's authority to do a particular act is excluded "and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner". The general authority of a partner to bind the firm is limited. "Each partner is an agent only in and for the business of the firm; and, therefore, his acts beyond that business will not bind the firm": Bank of Australasia v. Breillat [55] . If a partner's act is not in fact "for the purpose of the business of the partnership" the firm is bound by his act only if it is "an act for carrying on in the usual way business of the kind carried on by the firm" and the absence of authority is unknown to the person with whom he is dealing. Acts done in the usual way of carrying on a partnership business are usually done for the purpose of the business and unless the person with whom the partner is dealing knows that the act is not done for that purpose, he may assume that it is. In this case, the partnership would be bound by the authority purportedly given by Mr. Davis to the Bank on behalf of the firm to collect the cheques and to credit the proceeds to the firm's account if, but only if, the act of depositing the cheques was "an act for carrying on in the usual way" the firm's business. An act which is not done "in the ordinary course" of a firm's business cannot be "an act for carrying on in the usual way" the firm's business. (I do not need to consider the converse proposition.) Therefore, if Mr. Davis' act in depositing the cheques was outside the ordinary course of the firm's business (so that no liability in tort arose pursuant to s. 10), it was not "an act for carrying on in the usual way" the firm's business (so that the firm did not authorize the Bank to collect the cheques and to credit the firm's account with the proceeds). If the Bank fails on the claim founded on fraud, the proposed claim for moneys had and received to the use of the Bank must also fail.

[43]

I am not sure that in Marsh v. Keating either the House of Lords or the judges whose opinion was taken meant to decide either that ignorance and want of means of knowledge will exonerate a person through whose account a sum of money has passed from responsibility, or that knowledge of the fact is essential to liability. Nothing more seems to me to have been decided than that there the defendants could not rely upon ignorance if they had the means of knowledge. The opinion does not say that knowledge was necessary. His Lordship found that, but for the lender's knowledge that Leslie was receiving their cheque for a purpose foreign to the purpose for which Louis had given him authority to operate on the London bank account, the payment of the proceeds of the cheque into the bank account by Leslie acting with Louis' authority would have sufficed to make Louis liable. He said [66] : this liability arises in the present case, if at all, from the fact that Leslie Jacobs was in fact acting under the general authority actually given by Louis Jacobs when he indorsed Messrs. Morris's cheque, and thus authorized its presentation on behalf of Louis Jacobs by the London and Westminster Bank with whose name it was crossed, and the payment of it to the London and Westminster Bank by the bank on whom Messrs. Morris had drawn the cheque. It seems to me that Louis Jacobs, by so doing, himself lent the proceeds of the cheque to the London and Westminster Bank. It seems to me that that which was done was done under an actual authority; and I doubt whether one need resort to ostensible authority or estoppel to found a charge against Mr. Louis Jacobs. However, as Messrs Morris, knowing the terms of the power of attorney, were not misled into thinking that Leslie Jacobs had authority to borrow on behalf of Louis Jacobs and as Louis Jacobs received no benefit from the loan, his Lordship held that Louis Jacobs was not liable for the money lent [67] . 1. [1902] 1 Ch., at pp. 830-831. 2. [1902] 1 Ch., at p. 831. 3. [1902] 1 Ch., at p. 832.

[65]

The "act" upon which the Bank relies in the present case is the making of the representation involved in Mr. Davis' depositing of the cheques to the credit of the trust account, namely, that the partnership had the authority of the owner of each cheque to deposit it to the credit of that account: cf. Reg. v. Lambie [7] . That representation was fraudulent in that it was false to the knowledge of Mr. Davis and was made by him to induce the Bank to collect and apply the proceeds of the cheques without the authority of the true owner. As between the two partners, its fraudulent character would, of itself, suffice to take it outside Mr. Davis' actual authority. Section 10 of the Partnership Act is not, however, concerned with the limits of actual authority as between the partners themselves. It is concerned with the relationship between a non-partner ("any person not being a partner of the firm") and one or more of the partners. It operates to protect the non-partner who sustains loss or injury caused by the wrongful act or omission of a partner in circumstances which satisfy the requirement that the act in question was done by the partner acting in the ordinary course of the business of the partnership. The mere fact that a particular act or omission was wrongful or in fact unauthorized does not preclude it from being within the ordinary course of that business. If it did, the protection of s. 10 would be illusory. What is decisive in determining whether the requirement is satisfied, is the capacity in which the errant partner was acting, viewed in the context of his relationship with the person who sustained loss or injury and from the viewpoint of that person, at the time he performed the wrongful act: "the part taken by [the partner] in the transactions must be regarded as upon the surface it appeared to" the injured party: per Rich, Dixon, Evatt and McTiernan JJ. in Polkinghorne v. Holland [8] . Where, as in the present case, the wrongful act takes the form of a fraudulent representation, the content of the representation and the circumstances in which it was made, rather than its fraudulent character, will determine whether, viewed in the context of that relationship and from the viewpoint of that other person, the representation was made by the partner acting in the ordinary course of the firm's business. In such a case, the essential question will commonly be whether the making of that representation in those circumstances came within the scope of a " class " of act which would normally be transacted in the course of a business of the relevant kind: cf. Uxbridge Permanent Benefit Building Society v. Pickard [9] ; Lloyd v. Grace, Smith & Co. [10] ; Barwick v. English Joint Stock Bank [11] .

[67]

The relationship between the Bank and the partnership in the present case was the ordinary one of banker and customer. It will subsequently be necessary to give closer consideration to what came within the ordinary course of that business for the purposes of s. 10 of the Partnership Act. For the moment, it suffices to say that, on any approach, the ordinary course of that business encompassed the day to day conduct of the firm's banking activities which, of necessity, included the deposit of cash and cheques to be credited to one or other of the partnership's accounts with the Bank and the making of the implied representation that the partnership had the authority of the owner (be it the partnership itself or some client or other person) of any such cash or cheque to deal with it in that way. The Bank obviously treated the deposit of the two cheques to be credited to the trust account, and the implied representation which it involved, as being within the ordinary course of the partnership's business with it. The question arises whether there was anything about the cheques themselves or in the circumstances surrounding their deposit which had the effect that those particular acts were not within the classes of act encompassed by the ordinary course of the business of the partnership. The general character of the relevant act, namely the deposit by one partner of a cheque to be collected and credited to the partnership's own bank account, would plainly be within the ordinary course of the business of almost any partnership. As the learned trial judge (Yeldham J.) pointed out, however, some of the circumstances relating to the deposit of the two cheques call for special consideration. First, the cheques were in amounts larger than had commonly been credited to the trust account of the partnership. Secondly, they were deposited by Mr. Davis personally whereas the partnership's banking was ordinarily done by a secretary. Thirdly, Mr. Davis used a deposit slip and not the ordinary deposit book of the partnership trust account. Fourthly, the recent history of the partnership trust account was unusual in that the account had, for significant periods, been in overdraft; it was, however, in credit at the time the cheques involved in the present case were deposited. Fifthly, the larger cheque was drawn in favour of a company and not to the partnership and was crossed "account payee only". And, sixthly, the larger cheque and another cheque, which was drawn in favour of the same company, were paid into a trust account of a partnership of which the person who had indorsed the larger cheque as a "Director" of the payee company was a partner.

[72]

It is highly likely that the conduct of any modern accountancy practice will, from time to time, involve the receipt and holding of moneys on account of clients. High likelihood approaches inevitability in the case of a practice which, like the partnership in the present case, provides an investment service in the course of which it receives and applies moneys on behalf of its clients. For that reason, the ordinary firm of accountants will, as a matter of course, maintain a separate bank account, a "trust account", into which cash or cheques received to be held and applied on behalf of clients are paid pending their application for the purpose for which they are held. Indeed, as the "Ethical Pronouncements" of the Australian Society of Accountants make plain, it is difficult to envisage how an ordinary accountancy practice could be carried on, in compliance with the ethics of the profession, without maintaining a "separate Trust Bank Account" into which it is an "absolute necessity" that cheques or cash "received on behalf of another person or entity shall be deposited": see Australian Society of Accountants Members' Handbook, vol. II, at pp. 13,038, 15,041. While some of the moneys held to the credit of such an account may be the partners' own moneys representing, for example, unappropriated fees (ibid., p. 13,038), it is unusual for cheques or cash owned by the partners themselves to be paid into such a trust account. The cheques or cash paid to the credit of such an account will, as a matter of the ordinary course of business of a firm of accountants, usually be beneficially owned by others. Among such cheques, it is likely that there will on occasion be "third party" cheques made payable to, and received on behalf of, clients as distinct from cheques drawn by clients in favour of the firm of accountants. So much is, I would have thought, common practice and common knowledge. It was, in any event, confirmed by the express evidence in the present case which was not, and really could not be, disputed.

[93]

As has been indicated, the question whether an act falls within the ordinary course of the business of a firm will usually be determined by reference to whether it comes within the scope of a " class " of act which would normally be encompassed within the flow of the business activities of a firm carrying on a business of the relevant kind and size. The reason is that the question whether a particular act was within the ordinary course of business of a particular firm for the purposes of s. 10 of the Partnership Act must be determined by reference to what appeared upon the surface to the injured third party. Thus, unless the third party is aware of it, the fact that an act is fraudulent or part of a wider course of unlawful conduct which is engaged in for some collateral non-partnership purpose or benefit will not of itself take the act outside the ordinary course of the business of the firm if it is of a class of act which comes within the ordinary course of that business: see Polkinghorne v. Holland [13] ; Lloyd v. Grace, Smith & Co. [14] . Again, if the third party lacks actual knowledge of the precise limits of the activities of the particular firm, the appearance of things will be likely to reflect what normally comes within the ordinary course of a business of that kind and size: cf. Uxbridge Permanent Benefit Building Society [15] . The evidence in the present case does not disclose the extent of the Bank's actual knowledge of the precise limits of the classes of act which comprised the partnership business. Ultimately, however, that is unimportant because Mr. Batty's evidence established that the classes of transaction and activity involved in the course of the partnership business closely corresponded, in relevant respects, with what one would expect of such an accountancy practice. The partnership of Mr. Davis and Mr. Batty did provide an investment service in the course of which it received and applied moneys on behalf of clients. It did maintain a separate trust account. The moneys paid into that separate trust account, in the ordinary course of business, included (as Mr. Batty noted in his testimony) "dividends and interest payments collected through the firm" which were beneficially owned by clients. Third party cheques were, albeit very much as the exception rather than the rule, paid into that trust account in the ordinary course of the partnership business. While, not surprisingly, Mr. Batty could not remember precise instances, his evidence in relation to such cheques was quite unambiguous:

[112]

The second question is whether Mr. Batty is liable to the Bank for money had and received to the use of the Bank. The basis upon which that claim is made is that the proceeds of the cheques were moneys paid by the Bank to the partnership under a mistake of fact induced by the fraudulent misrepresentation of Mr. Davis. The pursuit of this claim to a successful conclusion may have involved the question whether the Bank was required to waive the tort of fraud in order to recover upon a count of money had and received: United Australia Ltd. v. Barclays Bank Ltd. [26] . It does not seem to me to matter for the purposes of this claim whether or not Mr. Davis' fraud was in the ordinary course of the partnership business; what matters is whether the Bank by reason of the fraud paid money to the firm under a mistake of fact. Of course, as the Chief Justice recognizes in his reasons for judgment, it may be necessary for the Bank to succeed on this count for the money paid to have been the money of the Bank. That was not established, but, even upon the assumption that it was, the Bank was not entitled to recover it from Mr. Batty for the reasons given by the Chief Justice and Wilson J. The credit entry in the partnership bank account was, for the purposes of the claim for money had and received, sufficient to establish that the money was paid, but the question remained whether it was paid to the firm having regard to the circumstance that it was not in fact used in, and did not otherwise enter into, the course of the partnership business. If that had been the case, then whether Mr. Batty knew of it or not, he would have been liable as a partner, but as it was not, the question was whether, as explained by Dixon J. in James v. Oxley [1] , the receipt by the partnership of the money in its bank account was a mere technical receipt involving no de facto control on the part of Mr. Batty as a partner or whether he knew or ought to have known of its presence before it was withdrawn so that the firm, and he as a partner, might properly have been regarded as holding it to the use of the Bank. There is no basis upon which it might be properly said that Mr. Batty knew or ought to have known of the presence of the money.

At a glance

Court

Decision date

Before

Source

Judgment (113 paragraphs)

Parties

Cases Cited (1)