NIML Ltd v MAN Financial Australia Ltd

TORTS - Conversion - Whether collecting bank liable for conversion of cheque - Vicarious liability - Personal liability as principal of innocent agent - Whether respondent vicariously or personally liable for conversion of cheque by collecting bank - Whether protection afforded to collecting bank by s. 95 of Cheques Act 1986, extended to respondent - Cheques Act 1986, ss. 94 and 95.

1 In my opinion the appeal should be allowed, the judgment below set aside and judgment entered for the appellant for damages for conversion for the reasons stated by Nettle, J.A.

2 This is an appeal from a judgment given in the Commercial and Equity Division on 15 December 2004. The appellant ("NIML") sought to recover from the respondent ("MFA")[1] some $2.6 million misappropriated from NIML by one of its employees. The theft was effected by means of cheques drawn on NIML's account with Westpac Banking Corporation ("Westpac") and the crediting of the proceeds of the cheques to thief's private futures trading account with MFA. NIML contended that MFA was liable for conversion of the cheques or alternatively for the amount of the cheques as moneys had and received to the use of NIML or alternatively as property knowingly received in breach of trust. The judge dismissed the claim.

The facts

3 At relevant times NIML managed the funds of the Norwich Life group of companies and of a number of large external superannuation funds. It had a cheque account with Westpac at the Westpac branch at 341 George Street, Sydney ("the NIML account"). It was a term of the NIML account that all cheques be signed by two authorised signatories. Shane Burke, who was the company secretary and financial controller of the Norwich group, was one of the authorised signatories.

4 At relevant times MFA was a futures broker and foreign exchange dealer and on 26 April 1996 Burke established a private futures trading account with MFA ("the MFA Burke Futures Account"). The terms of the account were prescribed in a standard form MFA private clients' agreement into which Burke entered with MFA.

It included terms that:

• MFA might call for payment of deposit or margin as MFA in its absolute discretion deemed necessary to protect itself from the personal obligations incurred by dealing in futures contracts on behalf of the client.

• Time was of the essence in the payment of margin calls and that, if no other time were stipulated by MFA when making a call, the required response must be made within 24 hours; and

• MFA would segregate and invest all money and property received by it from or on behalf of the client in accordance with The Corporations Law and the relevant rules of the Sydney Futures Exchange.

5 At relevant times MFA maintained a trading account with Westpac at the Westpac branch at 509 St Kilda Road, Melbourne ("the MFA Account"). The MFA Account was a client segregated account as required by s.1209 of the Corporations Law. All amounts deposited by clients for trading in futures were deposited into the MFA Account and, in accordance with the requirements of s.1209, money was only paid out of the MFA Account:

a) to another account in the client's name, in accordance with the client's instructions;

b) to a third party account in accordance with the client's written instructions;

d) to pay fees or other expenses liable to be paid by the client in connection with the client's futures trades; or

e) to the client's Margin Foreign Exchange Account to meet a margin call in respect of the client's Margin Foreign Exchange trading.

6 MFA did not accept cash, and the hand delivery of cheques was not feasible for clients based outside the Sydney CBD. Cheques sent through the post caused delay in processing and delay was not acceptable because futures clients were required to pay within 24 hours any calls made by MFA for margins to maintain open futures contracts. MFA's clients were, therefore, given details of the MFA Account so that they could make direct deposits for credit to their futures trading accounts.

7 The MFA Account statements sent by Westpac to MFA did not identify direct depositors by name or specify the client account to which any direct deposit was to be credited. MFA was dependent on each of its clients to inform it of deposits made by or on behalf of the client and thus the client account to which the deposit should be credited.

8 Between 10 April 1997 and 10 June 1998 Burke misappropriated $2,596,777 from NIML by fraudulently drawing cheques on the NIML account, as follows:

10/04/97 408407 175,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

04/06/97 408419 165,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

07/08/97 408431 195,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

24/12/97 408487 242,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

21/01/98 408500 270,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

11/02/98 408508 180,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

11/03/98 408520 232,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

06/04/98 408535 90,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

22/04/98 408542 180,000.00 Ord Minnet -A/C 032-000 700812 (NUIM)

14/05/98 408550 85,040.00 Ord Minnet -A/C 032-000 700812 (NUIM)

03/06/98 408556 45,745.16 Ord Minnet -A/C 032-000 700812 (NUIM)

17/06/98 408558 48,356.00 Ord Minnet -A/C 032-000 700812

22/06/98 408560 98,635.84 Ord Minnet -A/C 032-000 700812 (NUIM)

9 Each cheque was drawn payable to Ord Minnet (as MFA was then called)[2] or bearer and crossed not negotiable, and each cheque was signed by Burke and by one other authorised signatory. Burke deposited each cheque to the credit of the MFA Account.

10 After depositing each cheque, Burke telephoned or sent a fax to David Kiely, his broker employed by MFA, informing Kiely that he had made the deposit. Kiely in turn informed the "Back Office" of MFA that the funds so deposited were to be credited to the MFA Burke Futures Account.

11 Thereafter the proceeds of the cheques were paid out of the MFA Account, in accordance with Burke's instructions, as follows:

a) $636,488.93 was paid in settlement of futures trading;

b) $430,000 was transferred to an account with the Commonwealth Bank in the name of JHL Design (apparently for renovations to Burke's house);

c) $535,092 was transferred to an account with the ANZ Bank in Burke's name;

d) $730,000 was transferred to a Cash Management Trust account with Ord Minnett Limited in the name of Burke's wife, Lillian Burke;

f) $30,355.73 was transferred to Burke's Margin Foreign Exchange account and paid in settlement of Margin Foreign Exchange trading;

g) $287 was paid in bank fees; and

h) $333.70 was paid in tax.

The judge's reasons

12 The judge rejected NIML's claim in conversion for three reasons:

• First, his Honour said that he considered that, because the cheques were drawn payable to MFA, the deposit of the funds into the MFA's account accorded with "the apparently lawful mandate of NIML as the drawer of the cheques", and thus:

"To repeat and adapt the words of Tadgell J in the Hunter BNZ Finance case,[3] [scil. '...it is incontestable that the question whether a particular person was ever intended by the drawer of a cheque to benefit from the cheque, or can assert against the drawer a right to benefit from it, will be determined ultimately by reference to what the cheque says.'] what the cheque says is what Westpac did; and that is what NIML by its mandate required. One cannot commit a conversion if one does no more and no less than obey the instructions of the owner of the goods."

• Secondly, his Honour said that he considered that his conclusion was supported by the observation of Scrutton, L.J. in Lloyds Bank Ltd v The Chartered Bank of India, Australia and China,[4] that:

"...it is established that a third party, dealing in good faith with an agent acting within his ostensible authority, is not prejudiced by the fact that as between the principal and his agent the agent is using his authority in such a way that the principal can likely complain that the agent is using his authority for his own benefit and not for that of his principal."

• Thirdly, his Honour observed that it was significant that there had been no claim in conversion in the Port of Brisbane Corporation case[5] or in Re Montague,[6] and that:

"...If NIML's submissions on the point are correct, conversion would have been open to the plaintiffs in each case. It is also significant that nothing in either Midland Bank Ltd v Reckitt[7] or Morison v London County and Westminster Bank Ltd[8] is inconsistent with the above."

13 It followed in the judge's view that, because the allegation "that MFA has committed conversion rests on the allegation that, in doing as it did, Westpac acted as agent", MFA was not liable.

14 The judge rejected the claim for moneys had and received on the basis MFA had paid away the moneys in ignorance of the fraud and in accordance with its contractual obligations as a futures broker. His Honour held that the payments away were made "on the faith of the receipt" and so therefore that the receipt was not one by which MFA was unjustly enriched - or, indeed, enriched at all.

15 The judge rejected the claim for receipt of trust property, on the basis that MFA did not have actual knowledge of Burke's fraud and that it was not to be imputed with constructive knowledge of the fraud. As his Honour put it:

" ... whatever knowledge individual employees of MFA may have had, none knew of Mr Burke's misdemeanours. Some knew that he used the client's segregated account not merely for purposes associated with the client/broker relationship. They knew that funds having been paid into that account were very shortly thereafter dispersed not to advance Mr Burke's futures trading activities but for other, quite separate, reasons. Of all the facts relied upon by NIML, this in my opinion is the only circumstance that approaches something upon the basis of which any MFA employee might have inferred misconduct on the part of Mr Burke. But the employee most closely connected with him, Mr David Kiely, said in evidence that I accept that:

'Some clients effectively used their futures trading account as a private bank because there were no fees payable unless the client traded or requested a transfer of funds by letter of credit or telegraphic transfer.'

Mr Kiely also swore that it was 'not uncommon' for clients to deposit large sums in the clients' segregated account and to direct the disbursement of those funds to third parties. Again, I accept this evidence."

The judge held that MFA should not be held accountable for the failure of its employees to draw the inference which NIML contended that it should have drawn.

The appellant's contentions

16 NIML's principal grounds of appeal are directed to the issue of conversion. [9] It contends that the judge was wrong in law in holding that MFA was not liable for conversion of the cheques. It submits that the judge's reliance on the observations of Tadgell, J. in Hunter BNZ [10] was misplaced and that the judge erred by treating Westpac as if it had acted only as paying bank, and thus by treating an apparently lawful mandate to pay cheques as determinative of the question of Westpac's liability as a collecting bank. In NIML's submission it is clear that Westpac acted in the capacities of both paying bank and collecting bank and that it was Westpac's actions as collecting bank as opposed to its actions as paying bank which rendered MFA liable in conversion. Further, it is contended that the apparently lawful mandate to pay cheques drawn on NIML's account was irrelevant to Westpac's liability for conversion as collecting bank.

17 NIML also attacks the judge's reasoning with respect to the claims for money had and received and for knowing receipt of trust property. It submits that the judge was in error in treating the moneys as received by MFA as a mere conduit and as having been paid away by MFA on the faith of the receipt of the moneys, as opposed to Burke's instructions. NIML contends that it lay upon MFA to establish that it did not have notice that the moneys were NIML moneys and that MFA failed to do so.

Conversion

18 It is convenient to begin with NIML's case in conversion. At the outset, I am inclined to accept that there is not a great deal in Hunter BNZ [11] that is of relevance to this case. Hunter BNZ was concerned with cheques which had been lawfully drawn by officers of the plaintiff company within the scope of their actual authority and with the intention that the cheques should be paid to the named payees. It was in that context that Tadgell, J. stated that it was "...incontestable that the question whether a particular person was ever intended by the drawer of a cheque to benefit from the cheque, or can assert against the drawer a right to benefit from it, will be determined ultimately by reference to what the cheque says." This case is concerned with an essentially different problem of cheques drawn by an agent in pretended exercise of his authority to draw cheques on behalf of his principal but in fact in fraud on the principal for the agent's own purposes. In such a case, it is plain that the principal remains the true owner of the cheque with the right to immediate possession of the cheque until the cheque is discharged. As Lord Atkin put it in Midland Bank v Reckitt: [12]

"The Court of Appeal, rightly, as I think, came to the conclusion that the rights of the parties would be determined by the view taken as to these particular transactions. In the first place [the agent] had no actual authority to draw these cheques at all or to receive the proceeds. His only actual authority was to draw cheques for his principal's purposes. Accordingly, if it can be supposed that [the principal] found [the agent] standing at the counter of the bank waiting to pay in one of the cheques he could, if he knew the true facts, have demanded the immediate delivery of the cheque to [the principal]. It was [the principal's] property, and [the agent] had no title to it. In these circumstances I have no doubt that the bank in presenting the cheques and receiving payment for the cheques converted them."[13]

19 With respect, however, I agree with the judge that the passage which his Honour cited from the judgement of Scrutton, L.J. in Lloyds Bank Ltd v The Chartered Bank of India, Australia and China [14] is in point. Plainly, a third party dealing in good faith with an agent acting within the scope of ostensible authority is not prejudiced by the fact that the agent is in fact acting in abuse of his authority. So much is the consequence of a doctrine of ostensible authority that represents a species of estoppel operating within the framework of agency principles.[15] If, therefore, an agent, acting within the scope of ostensible authority, although in fact beyond authority, draws a cheque in favour of a named payee and the named payee, while knowing no more than that the drawing is within the scope of the agent's ostensible authority, receives payment on the cheque, the drawing may be binding as between the agent's principal and the named payee.

20 It is to be noted that Scrutton, L.J. went on in Lloyds Bank Ltd v The Chartered Bank of India, Australia and China to point out that it is otherwise where the named payee has notice that the agent is acting in excess of his ostensible authority. Hence, as it was held in that case, where an employee of the plaintiff with authority to draw cheques on the plaintiff's bank account for the plaintiff's purposes drew cheques payable to a collecting bank, and deposited them with that bank with a memorandum of instructions to collect the cheques for his account, the collecting bank was not entitled to treat those instructions as binding on the plaintiff. As Scrutton, L.J. said, while there was nothing in the terms of the cheques themselves to suggest that the drawing was beyond power, and therefore the plaintiff could probably not have sued the paying bank, the memorandum of instructions made plain that the agent did not purport to act as agent for the company or to create privity between the company and the collecting bank. He acted and purported to act for himself as principal.[16]

21 Consequently, where a bank is dependent upon the ostensible authority of an agent of the drawer, and fraud is involved, the mere fact that payment of a cheque accords with the apparently lawful mandate of the drawer may not be enough to save the bank from liability for conversion in its capacity as collecting bank.[17]

22 Despite that being so, I am inclined to agree with the judge that Westpac was not liable in conversion, although my reasoning is different to his Honour's.

Westpac's liability for conversion

23 Clearly, a bank which acts as a paying bank derives its authority to pay a cheque from the authority given to it by the drawer of the cheque to pay cheques drawn on the drawer's account. Just as clearly, a bank which acts as a collecting bank derives its authority from the payee of the cheque to present the cheque for collection and for credit of the proceeds of collection to the payee's account.[18] As a rule, therefore, it is neither unrealistic nor out of place to conceive of the roles of a bank separately in terms of its capacity as paying bank and its capacity as collecting bank, even where the bank is acting in both capacities. [19] As Greer, L.J. explained in Carpenters' Company v British Mutual Banking Co.,[20] in a case in which the fraudulent servant of a company had forged the indorsement of company cheques to himself and deposited them with the bank for credit to his account, the bank was protected in its capacity as paying bank by s.60 of the Bills of Exchange Act 1882[21] but it was:

"...as the receiving bank, liable for conversion of the cheques. It received the crossed cheques from [the drawers' fraudulent servant] at a time when [the drawers] were the true owners of the cheques. It dealt with the cheques at the request of the [drawers'] fraudulent servant, received the cheques from him, and immediately passed them to the credit of his account. It did not in this case cash the cheques over the counter, and it is unnecessary to consider what would have been the result if instead of passing them to [the fraudulent servant's] credit the bank had paid him the cash over the counter. In my opinion, though it is unnecessary to decide this in the present case, it would still as receiving bank be liable in conversion. Be this as it may, on the facts proved in the present case I think when the bank received the cheques and passed them to the credit of [the fraudulent servant's] private account it converted the cheques by dealing with them as if they were [the fraudulent servant's] property and immediately crediting him with the amount thereof. "[22]

24 Yet there are some cases in which it would be artificial to draw a distinction between a bank's authority as paying bank and the bank's authority as collecting bank. One example is where the drawer and the payee of the cheque are the same customer. Lord Upjohn explained it in Universal Guarantee Pty Ltd v National Bank of Australasia Ltd, as follows:

"In this case only the Bank and its customer, the plaintiff company, were concerned. When the Bank received the cheque it did not 'pay' it to anyone and it did not 'collect ' it on behalf of anyone. It made two contra entries in the same account of its customer. In truth and in law nothing was paid out and nothing was collected or paid in. In the result the debtor/creditor relationship between the banker and its customer remained entirely unaffected. In such circumstances any analysis of the obligations of the Bank as a 'paying' or 'collecting ' Bank is unrealistic and entirely out of place, as is any allegation of tortious neglect."[23]

25 In my view this case is another in which it would be artificial to draw a distinction between a bank's authority as paying bank and its authority as collecting bank.

26 Speaking generally, where a cheque is drawn in favour of a named payee and the bank on which the cheque is drawn is also the bank of the named payee, and the drawer deposits the cheque with that bank for credit to the account of the named payee, the drawer will not be heard to complain if the bank credits the proceeds of the cheque to the account of the named payee. The drawer's request to credit the proceeds to the account of the named payee estops the drawer from contending that the bank has dealt with the cheque otherwise than in accordance with the rights of the drawer.[24]

27 Similarly, if a cheque is drawn by an agent with ostensible authority to draw cheques on behalf of the drawer, and the cheque is deposited by the agent with the bank for collection for the account of the named payee, logic implies that the drawer should not be heard to complain if the bank credits the proceeds to the account of the named payee. While it may be said that the drawer only ever conferred authority on the agent to draw cheques, and thus that the drawer only ever clothed the agent with authority to give instructions to the bank in its capacity as paying bank, in reality a representation that an agent has authority to issue a cheque in favour of a named payee is tantamount to a representation that the agent has authority to request that the proceeds of the cheque be credited to the account of the named payee. Hence, as it appears to me, the real significance of the passage from the judgment of Scrutton, L.J. in Lloyds Bank Ltd v The Chartered Bank of India, Australia and China which was cited by the judge.

28 The decision of the Privy Council in Corporation Agencies Ltd v Home Bank of Canada[25] makes the point. A by-law of the appellant company authorized its secretary-treasurer jointly with any director to sign cheques drawn upon its bank account. A series of cheques payable to one of the directors were fraudulently signed by the director jointly with the secretary-treasurer, and after indorsement were placed by the collecting bank to the credit of the director's account. In an action by the appellant to recover the value of those and other cheques drawn in fraud on the appellant, it was held that the appellant's claim failed because[26] the collecting bank had no knowledge, either by the form of the cheques collected or otherwise, that they were improperly drawn on the appellant's account. The case was conducted as one of knowing receipt of trust property - for which the test of knowledge may in some circumstances be different - but Scrutton, L.J. referred to the case when dealing with the claim in conversion in Lloyd's Bank and stated that the thing which distinguished the two cases was that in the former the Privy Council had treated the cheques as drawn within an ostensible authority. [27]

29 NIML submits that what was said in Lloyds Bank is only of relevance in the case of a paying bank. In my view that is not so. Lloyds Bank was about the liabilities of a collecting bank and in the passage cited Scrutton, L.J. was addressing an argument by counsel that, because the cheques in question had been "issued" on behalf of the plaintiff bank by two agents who had ostensible authority to issue the cheques on behalf of the plaintiff, the defendant was entitled to rely on the ostensible authority of those agents. His Lordship accepted the proposition that a collecting bank would be entitled to rely upon the ostensible authority of an agent to issue a cheque for collection but then went on to say that in the particular circumstances of the case there could be no reliance on ostensible authority, because:

"It seems to me that each cheque taken by itself was 'issued,' being signed and dealt with by person having ostensible authority to sign and issue it, but the accompanying memorandum signed by Lawson alone and its directions gave notice of irregularity, which destroyed the holding in due course."[28]

30 In truth the difficulty for the collecting bank in Lloyds Bank was that the cheques were drawn by the authorised signatory in favour of the collecting bank and, instead of placing the proceeds to the credit of the collecting bank and seeking the drawer's instructions, the collecting bank credited them to the fraudulent agent's account in accordance with his instructions. There was no obvious reason why cheques drawn on the drawer's account payable to the collecting bank should be dealt with for the personal benefit of the fraudulent agent. Therefore it was held that the bank was put on inquiry.

31 In this case there are no such problems for Westpac. Unlike Midland Bank Ltd v Reckitt[29], the judge found that there was nothing on the face of the cheques to disclose to Westpac that the cheques[30] were drawn for Burke's private purposes and, unlike Lloyds Bank v Bank of India,[31] the cheques were not drawn in favour of Westpac and Burke's instructions did not disclose to Westpac that the cheques were being deposited for Burke's own purposes. The cheques were drawn payable to MFA[32] and on its face each cheque was in order and in accordance with Burke's authority to issue cheques on behalf of NIML.

32 NIML also submits that the decision of the English Court of Appeal in A.L. Underwood Ltd v Bank of Liverpool [33] precludes the possibility of a collecting bank relying upon an authority issued to it in the capacity of paying bank in order to defeat its liability for conversion as a collecting bank. But in my view that is also not so. Underwood was about a one man company in which the sole director received a number of cheques drawn payable to the company and then instructed his bank to present the cheques for collection and to credit the proceeds of collection to his personal account. It was held that the collecting bank was liable on the basis that the act of an agent paying his principal's cheques into his own account was so unusual as to put the bank on inquiry; and on the basis that the director when paying in the cheques did not purport to act as the company's agent, but as being himself the company, and that the bank so treated him. Neither consideration applies here.

33 Of course an authority to draw a cheque is not in terms the same thing as authority in terms to deposit a cheque. Accordingly, there will be cases in which an authority to draw cheques may not be taken as an authority to deposit such cheques for collection. But as Tomlin, J. observed in Lloyd's Bank v The Chartered Bank of India[34], where an agent draws a cheque on his principal's account payable to a named payee and sends it to the named payee's bank for credit to the named payee's account, it is not admissible to separate the signing of a cheque from the acts whereby the cheque and the instructions for dealing with it pass into the hands of the collecting bank. Other things being equal, the transaction may be regarded as a whole for the purposes of determining where lies the property in the paper.[35]

34 So, where one is dealing with cheques drawn by an authorised signatory in favour of a named payee, and the cheques are deposited upon the instructions of the authorised signatory for the account of the named payee, the authority to draw the cheques is in reality so close to authority to deposit the cheques that I consider that the latter is to be implied.

35 It follows in my view that Westpac was entitled to rely upon the apparent authority of Burke to draw cheques in favour of MFA as authority to instruct Westpac to collect those cheques for the account of MFA and, for that reason, I consider that Westpac is not liable for conversion of the cheques.

MFA's liability for conversion

36 It is at that point that I part company with the judge. His Honour reasoned that, because Westpac was not liable, MFA was not liable. With respect, I take a different view. As I see it, MFA knew through its agent, Westpac, that Burke's deposits to the account were made by cheques drawn by Burke on NIML's account. MFA also knew, through its employees Kiely and in the back office, that Burke's deposits to the MFA Account were for Burke's own benefit. In that way, MFA had notice that Burke was using NIML cheques for his own purposes and therefore was on notice of an irregularity. Just as in Lloyds Bank v Bank of India that was enough to make MFA liable in conversion.

37 It was contended on behalf of MFA that it was not open to aggregate knowledge held by officers of MFA with knowledge held by Westpac. Reference was made to the observations of Ashley, A.J.A. in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [36] as to the impermissibility of aggregating knowledge for the purposes of the law relating to the knowing receipt of trust property and knowing involvement in breach of trust,[37] and it was submitted that the same considerations applied here. On that basis it was said that the judge was right to conclude, as his Honour did, that :

"...a corporation cannot acquire knowledge, constructive or otherwise, by aggregating particular facts known to a number of individual employees so as to produce a notional (in this case MFA) representative who in that capacity is dishonest: Macquarie Bank Ltd v Sixty-fourth Throne Pty Ltd."[38]

38 I reject that submission. We are concerned here with the law of agency, and whatever may be the law relating to notice in cases of liability for knowing receipt of trust property and knowing involvement in breach of trust,[39] the law of agency, as it is stated in Bowstead, [40] is that:

1. A notification given to an agent is effective as such if the agent receives it within the scope of his actual or apparent authority, whether or not it is subsequently transmitted to the principal, unless the person seeking to charge the principal with notice knew that the agent intended to conceal his knowledge from the principal.

2. The law imputes to the principal and charges him with all notice or knowledge relating to the subject-matter of the agency which his agent acquires or obtains while acting as such agent.

3. Where an agent is authorised to enter into a transaction in which his own knowledge is material, or where the principal has a duty to investigate or make disclosure the knowledge of the agent may be attributed to the principal whether it was acquired in connection with the agency or not.

39 For present purposes, the second of those rules may be put aside. The extent of its application is uncertain [41] and in this country its scope of operation appears limited to instances where it is the duty of the agent to communicate knowledge to the principal.[42] Generally speaking, the idea seems to be that, where there is a duty to communicate, the consequent probability of communication is so strong that the fact of communication will be presumed (except in case of fraud).[43] But as far as I can see Westpac was not under a duty to inform MFA of the details of each cheque. Such duty as it may have had was limited to details of cheques about which there was reason for Westpac to be suspicious and, so far as Westpac was concerned, there was no particular reason to be suspicious of cheques drawn by Burke on the account of NIML.

40 The first and third rules are applicable. The juridical basis of the first rule is the subject of debate. The better view may be that it exists to prevent the "monstrous injustice" that a principal should have the advantage of what his agent knows without also the disadvantage of it.[44] But however that may be, it is in effect a corollary of the idea that once a principal constitutes an agent as agent for the purposes of receiving notice, the agent becomes the principal's alter ego for that purpose.[45] So, therefore, notice to the agent is effective as notice to the principal whether or not the agent actually communicates the notice to the principal.[46]

41 The application of the rule is illustrated by the decision in John v Dodwell and Co. Ltd.[47] A firm of stockbrokers employed clerks to receive cheques paid by customers in satisfaction of their accounts. A fraudster with authority to draw cheques on his principal's account for the purposes of the principal's business drew cheques payable to a firm of stockbrokers in settlement of his personal dealings with the firm. It was found as a fact that the members of the firm did not see or notice that the cheques were drawn on his principal's account. But it was held that, because the clerks must have seen it, the members of the firm had knowledge of it and that was so even though the clerks were not aware of its significance and did not bring it to the members' attention. Viscount Haldane, who delivered judgment of the Privy Council, said:

"... it is obvious that the appellants' clerks who brought the cheques to the partners for indorsement must have seen that the name of the drawers was that of the respondents. However little the clerks may have known of Williams' real transactions, and however innocently the cheques were brought and indorsed, the knowledge of the names on the part of the clerks was the knowledge of the appellants."[48]

42 That sort of reasoning is applicable in this case. MFA appointed Westpac as its agent to receive cheques payable to MFA. Accordingly, the deposit of each cheque with Westpac was effective as receipt of the cheque by MFA. Upon the deposit of each cheque with Westpac, Westpac learned that the cheque was drawn by Burke on NIML's account. Ipso facto MFA learned that the cheque was drawn by Burke on NIML's account. As against NIML, MFA will not be heard to say that it did not thereby acquire knowledge of the details of the cheques.

43 The third rule leads to the same conclusion. It is based or at least based in part on the idea that there are occasions in which an agent may be an agent to know. It applies among other situations where an agent retains a principal because the principal expects that the agent's knowledge will be of benefit to the principal in connection with the transaction in view. Thus, for example, where an insured retains a broker, the insured generally expects that the broker will use the knowledge which the broker has acquired in the insurance market to obtain more favourable terms than the insured could secure for itself. In those circumstances the broker is an agent to know and thus the agent's knowledge will bind the principal. [49]

44 That sort of reasoning also applies in this case. If a customer retains a bank to receive cheques and to present them for collection, the customer expects that the bank will employ the knowledge which it has acquired in the course of its business as a bank to ensure so far as it reasonably can that the presentation and collection of the cheques is lawful and effective. In those circumstances I take it that the bank is an agent to know and therefore that the bank's knowledge is binding on the customer.

45 MFA argues to the contrary on several bases. The first is to say that MFA did nothing with the cheques because Westpac acted as an independent principal and not as an agent for MFA.

46 In my view that is not so. Westpac did not purport to deal with the cheques as a holder for value, but merely as MFA's agent for collection of the cheques; having no title to the proceeds.[50]

47 Secondly, MFA says that even if Westpac were its agent Westpac had no authority to collect cheques in circumstances which amounted to conversion of cheques and that MFA cannot be liable for acts of Westpac in breach of its authority.

48 In my view that submission is unconvincing. It is plain that Westpac had authority to collect cheques deposited for credit to the MFA Account and there is neither evidence nor anything else which implies that the authority was limited to the collection of cheques to which there was good title.

49 It was submitted for MFA that such a restriction should be implied as in effect going without saying, and that the fact that it has been held that a collecting bank may refuse to collect a cheque where collection would render it liable to suit for conversion [51] supported that notion.

50 I reject that submission too. So far from such a restriction going without saying, it seems to me that it would be fanciful to imply it. The most that the collecting bank can ever do is exercise due skill and care. Frequently, it is impossible for a collecting bank to ascertain with certainty in advance of collection that its customer has good title to a cheque. Section 95 of the Cheques Act 1986 exists to protect a collecting bank in just such circumstances. It recognises that no matter that a collecting bank may exercise due care there will be occasions when that it is not enough to guard against conversion. The fact that a bank may refuse to collect when it suspects the possibility of conversion in no way detracts from that conclusion. On the contrary, it strengthens the impression that an authority to collect is not restricted to cheques in respect of which there is no risk of conversion. There would be no need to consider whether there is a right in the bank to refuse to collect when there is risk of conversion if there were an implied term of its arrangement with its customer which prohibited it from collecting in those circumstances.

51 Thirdly, MFA contends that even allowing that Westpac was its agent, MFA had no control over the way in which Westpac exercised its authority and that there cannot be vicarious liability in the absence of control. As I understand that argument it is based on the idea that an employer or principal is not liable for the manner in which an employee or agent performs an act authorised to be undertaken unless the employer or principal has control over the manner of performance. Counsel for MFA made reference to a range of cases concerning the liability of employees and other principals for the negligence of servants and agents in the course of performance of duties.[52] He submitted that this case is analogous. As he would have it, MFA simply engaged Westpac to collect cheques and left it to Westpac as to how it would go about the task of collection.

52 In my view the argument is untenable. The principles of control, both in the ancient sense and in the sense in which the idea of control is now understood[53] have little to do with the liability of a defendant for tortious acts committed by the defendant's agents at the defendant's direction. A principal is liable for loss or injury caused by the tort of his agent if the wrongful act is specifically instigated, authorised or ratified by the principal;[54] and, by its contract with Westpac, MFA directed Westpac to collect the cheques on behalf of MFA and credit the proceeds of the cheques to MFA's account. At least, the tort of conversion was the necessary consequence of the contract.[55]

53 It was further submitted for MFA that any contract between MFA and Westpac was not specific enough to come within that rule. As counsel put it, it was not so much a case of MFA specifically instigating, authorising or ratifying the collection of any particular cheques - even less the instant cheques - as at most a general arrangement for the collection of such cheques as may be paid in for the credit to the MFA Account.

54 I reject that too. It is rudimentary that a principal may authorise an agent to act in a general way which is necessarily tortious, and the fact that the principal does not particularise the acts which are authorised will be irrelevant. Thus the oft cited example uttered by Parke, B. in Cobbett v Grey[56] of a principal who orders his agent to take into custody all persons who may come upon the principal's land. The principal would be liable in trespass to any one of those persons if improperly arrested. In this case it is the same. MFA authorised Westpac to collect such cheques as might be deposited for credit to its account and hence, in those circumstances, MFA would be liable for conversion of any of the cheques dealt with contrary to the rights to immediate possession of the true owner.

55 MFA contended that it cannot be vicariously liable for conversion of the cheques unless Westpac is liable for their conversion.

56 I also reject that contention. It is premised upon a misconception that MFA's liability is vicarious liability. As I see it the true nature of the liability is a direct liability as principal for loss or injury caused by the wrongful act of its agent.[57] In the particular circumstances of this case Westpac was but an instrument for the implementation of the will of MFA.[58] In those circumstances, all that need to be shown is that the acts of Westpac amounted to conversion of the cheques and that those acts were done at the specific instigation or with the specific authorisation of MFA in the sense that I have described it. Just as in the criminal law a principal in the first degree need not commit the crime with his own hands, but may do so through an innocent agent,[59] so too in the law of torts a principal may be liable for a tort committed by his agent even though the agent is protected from liability or is immune from suit.[60] As Atiyah puts it:

" The liability of a person who makes himself a party to a tortious act committed by another is not strictly speaking, a vicarious, but a personal liability. He is liable not so much because the law imposes liability on him for the acts of the other, but because the law imposes liability on him for his own acts."[61]

57 It was further submitted for MFA that, even if MFA were otherwise liable for conversion of the cheques, Westpac had the benefit of s.95 of the Cheques Act 1986 and if Westpac had the benefit of the section it must follow that MFA also had the benefit of the section. I reject that argument, for three reasons:

1. To begin with, there was no finding below that Westpac would have been entitled to invoke the section although, to be fair, the judge did hold that:

"At all events, nothing in the evidence suggests that the bank had the slightest reason to think that the cheques should not be acted upon in accordance with their terms. There is 'no suggestion of negligence on its part'."

Arguably that is equivalent to receiving payment of the cheques "in good faith and without negligence."

2. In the second place, unless s.95 is to be construed as applying directly to the customer of a bank for whom the bank receives payment of a cheque, as opposed to the bank itself,[62] the argument that s.95 inures to the benefit of MFA is no better than that, because Westpac as agent has a defence under s.95, and is therefore not liable, MFA as principal cannot be liable. For the reasons already given, MFA's liability is not vicarious but personal. There is then no more reason to suppose that s.95 relieves MFA from liability than there is to suppose that Westpac's entitlement to rely on the ostensible authority of Burke (in circumstances in which MFA was not so entitled) relieved MFA from liability.

3. Thirdly, it is plain that upon its proper construction s.95 does not apply directly to MFA. The history of the section or at least its predecessor is essayed in the judgment of Isaacs, J. in The Commissioners of the State Bank of Victoria v Permewan Wright & Co Ltd, as follows:

"Once more Parliament intervened in 1876 by passing the Act 39 & 40 Vict. c. 81, which codified the law of crossed cheques up to that time, and, to meet the omission pointed out by Lord Cairns, modified the common law still further by providing that a person taking a cheque crossed generally or specially, and bearing in either case the words 'not negotiable', should not have or be capable of giving a better title than his transferor had. This did what some Judges had said was conceptionally impossible, namely, make a cheque not completely negotiable and still leave it a cheque.

The immediate object of doing that was to protect the real and rightful owner from theft and fraud by increasing the responsibility of the paying banker. But the effect of it at common law was also to make every person who wrongfully dealt with the cheque liable for conversion. Observe it required no special legislative direction for that purpose. Liability was a common law consequence, as soon as the instrument was made 'non-negotiable' by law, and was proved not to have been parted with by its owner. Aimed directly at such a case as Smith v. Union Bank of London [63] , so as to make the paying bank liable for a manifest breach of duty to obey the direction on the face of the cheque, it had the indirect but inevitable consequence of making a collecting bank liable for conversion, however innocent and careful it or its customer might be. The legislature therefore added--not a new duty, not a statutory obligation, as it seems to me, with very great respect to the view taken in Paget (pp. 257-258)--but a statutory qualification of a rigorous common law rule of absolute liability.

All persons other than a collecting banker still remained subject to that rule of liability, because they were unnamed, showing that it is not the Statute that creates the liability. The collecting banker, however, if he could show good faith and due care, was permitted to relieve himself from his prima facie responsibility." [64]

In my view that leaves no room to doubt that the section was only ever intended to apply to a collecting bank.[65]

58 It was further submitted on behalf of MFA that because MFA was bound by s.1209 of the Corporations Law to pay the proceeds of the cheques into the MFA account, s.1209 should be seen as relieving it of liability for having done as it was required to do.

59 I reject that submission as well. Section 1209 did not bind MFA to accept the cheques drawn by Burke or the proceeds of those cheques. MFA was free to refuse to receive the cheques and to require payment in some other form. It was only after MFA had made the decision to receive the cheques that s.1209 operated to require it to pay the cheques into the account.

60 Finally, it was submitted on behalf of MFA that the judge was correct in saying that:

" It is...significant that neither in the Port of Brisbane Corporation case [66] nor in Re Montagu [67] were proceedings taken in conversion. If NIML's submissions on the point are correct, conversion would have been open to the plaintiffs in each case...",

and it was contended that the fact that conversion had not been alleged in Port of Brisbane Corporation or Re Montagu was reason to doubt that MFA could be liable in conversion.

61 In my view that submission is not persuasive either. Port of Brisbane was similar to this case in the sense that the fraudster stole funds from the plaintiff by means of a cheque drawn on the plaintiff's account and deposited to the credit of the defendant's account. And, admittedly, as McPherson, J.A. noted,[68] the plaintiff chose to claim in restitution rather than for conversion. But so far as one can tell, there may have been any number of reasons for the plaintiff adopting that course. Its decision not to do so is not a basis for concluding anything about the availability of a remedy in conversion in such a case. With respect, I suggest that cases such as Lloyds Bank Ltd v The Chartered Bank of India, Australia and China [69] and Reckitt v Barnett Pembroke and Slater Ltd [70] are a far more certain guide that a remedy in conversion is available. Re Montagu seems also to have very little to do with the matters here in issue. That was a case in which the defendant was the owner at law of the chattels in question but it was contended that he had held those chattels on the trusts of a family settlement and dealt with them in breach of trust. Since the beneficiaries did not have a right to immediate possession of the chattels it was only to be expected that they would seek a remedy in equity for breach of trust rather than proceeding at law for damages for conversion.

Restitution and receipt of trust property

62 Given my conclusion that MFA is liable to NIML for the conversion of the cheques, it is unnecessary to consider the remaining grounds of appeal. In case it matters, however, I should say that I agree with respect with the judge, substantially for the reasons which his Honour gave, that the appellant's claims in restitution and for knowing receipt of trust property were rightly held to fail.

63 In the result , I would allow the appeal, and set aside the judgement below, and in lieu thereof I would order that the there be judgment for NIML for damages for conversion.

64 I have read the judgment of Nettle, J.A. and I agree that the appeal should be allowed for the reasons his Honour has expressed.

2. The judgment entered on 15 December 2004 is set aside and in lieu thereof there is judgment for the appellant for damages for conversion.

3. The proceeding is remitted to the trial judge for the purpose of assessing the damages and making an order for the costs of the trial.

4. The respondent is to pay the appellant's costs of the appeal.

---

[1] Formerly, Ord Minett Jardine Fleming Futures Ltd.

[2] That is, in some cases, to "Ord Minnett - A/C 032-000 700812 (A/C N.U.I.M.)"; and, in the remainder of cases, simply to "Ord Minnett".

[3] [1990] VicRp 4; [1990] V.R. 41 at 46.

[4] [1929] 1 K.B. 40 at 56; [1928] 2 All E.R. 285.

[5] Port of Brisbane Corporation v ANZ Securities Ltd (No 2) [2002] 2 Qd. R. 661.

[6] In re Montagu's Settlement Trusts [1987] Ch. 264.

[7] [1933] A.C. 1.

[8] [1914] 3 K.B. 356.

[9] As was the main part of its case below.

[10] [1990] VicRp 4; [1990] V.R. 41 at 46.

[11] [1990] VicRp 4; [1990] V.R. 41.

[12] [1933] A.C. 1.

[13] [1933] A.C. 1 at 14, see also Morrison v London County and Westminster Bank Ltd [1914] 3 K.B. 356 at 365; A.L. Underwood Ltd v Bank of Liverpool; Same v Barclays Bank [1924] 1 K.B. 775 at 790-791 and 795; Australian Guarantee Corporation Ltd v Commissioners of the State Bank of Victoria [1989] VicRp 57; [1989] V.R. 617 at 636; Voss v Suncorp-Metway Limited (No. 2) [2003] 1 Qd. R. 214 at 228[49]; Paget's Law of Banking 12th Ed. at [23.10]; Weaver and Craigie, The Law Relating to Banker and Customer in Australia, 3rd Ed. at [9.5900, par. 5]

[14] [1929] 1 K.B. 40 at 56; [1928] All E. R. 285.

[15] Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 170 C.L.R. 146 at 200.

[16] See also Reckitt v Barnett Pembroke & Slater Ltd [1929] A.C. 176 at 182.

[17] Carpenters' Company v British Mutual Banking Co. [1938] 1 K.B. 511 at 531-2, per Greer, L.J. and at 533, per Slesser, L.J., cf. at 538, per MacKinnon, L.J.; Universal Guarantee Pty Ltd v National Bank of Australasia Ltd [1965] 1 W.L.R. 691 at 696 (PC), [1965] 2 All E.R. 98; Linklaters v HSBC Plc [2003] EWHC 1113; [2003] 2 Lloyds Rep 545 at 554[44] and at 555[47], per Gross, J., Weaver and Craigie , The Law Relating to Banker and Customer in Australia (Vol.2) [15.740]; Brindle and Cox, Law of Bank Payments 3rd ed. 406-68.

[18] National Commercial Banking Corporation of Australasia Ltd v Batty [1986] HCA 21; (1986) 160 C.L.R. 251 at 263, 273, 274; Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 at 283, [1992] 4 All E.R. 451; Byles on Bills 27th ed. 23-02,03, 23-07-10; Paget's Law of Banking 12th ed. [22.2]; Tyree, Banking Law in Australia 4th Ed. at [33.1].

[19] Linklaters v HSBC Bank Plc [2003] EWHC 1113; [2003] 2 Lloyds Rep. 545 at [47].

[20] [1938] 1 K.B. 511.

[21] See now: Cheques Act 1986, s. 94.

[22] [1938] 1 K.B. 511 at 531.

[23] [1965] 1 W.L.R. 691 at 696; [1965] 2 All E.R. 98.

[24] Lysaght Bros & Co Ltd v Falk (1905) 2 C.L.R. 421 at 428.

[25] [1927] A.C. 318 at 324.

[26] Among other reasons.

[27] [1929] 1 K.B. 40 at 58.

[28] [1929] 1 K.B. 40 at 57.

[29] [1933] A.C. 1.

[30] And no attack is made on that finding.

[31] [1929] 1 K.B. 40.

[32] See footnote 2.

[33] [1924] 1 K.B. 775.

[34] [1929] 1 K.B. 40.

[35] Ibid at 76.

[36] As his Honour then was: [1998] 3 V.R. 133 at 160-1, in diss.

[37] Unless there were a duty to exchange knowledge as between those involved.

[38] [1998] 3 V.R. 133 at 144-5; El Ajou v Dollar Land Holdings Plc No.1 [1993] EWCA Civ 4; [1994] 2 All E.R. 685.

[39] And with respect, I do not doubt the rectitude of Ashley J.A,'s analysis.

[40] Bowstead & Reynolds on Agency, 17th Ed. at Article 97; see also Dalpont, Law of Agency at [22.48].

[41] Wyllie v Pollen (1863) 32 L.J. Ch. 782 at 783; Bradley v Riches (1878) 9 Ch. D. 189 at 196; Permanent Trustee v FAI [2001] NSWCA 20; (2001) 50 N.S.W.L.R 679; Bowstead & Reynolds on Agency, 16th Ed. at 8-204; Dalpont, Law of Agency at [20.2], and see the analysis of the authorities undertaken by Watts, P. in Imputed Knowledge in Agency Law - Excising the Fraud Exception (2001) 117 L.Q.R. 300.

[42] Sargent v A.S.L. Developments Pty Ltd [1974] HCA 40; (1974) 131 C.L.R. 634 at 658-9, per Mason, J.

[43] Boursot v Savage (1866) L.R. 2 Eq. 134 at 142; Kennedy v Green [1834] EngR 1072; (1834) 3 My. & K. 699, 40 E.R. 266; Watts, (2001) 117 L.Q.R. 300 at 304 et seq.

[44] Boursot v Savage, ibid.; and see Watts, ibid. at 307.

[45] Dresser v Norwood (1864) 7 C.B. (N.S.) 466 at 481; 144 E.R. 188 at 194.

[46] Tanham v Nicholson (1872) L.R. 5 H.L. 561 at 568.

[47] [1918] A.C. 563.

[48] [1918] A.C. 563 at 568.

[49] Taylor v Yorkshire Insurance Co Ltd [1913] 2 Ir.R. 1 at 32; Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] NSWCA 20; (2001) 50 N.S.W.L.R. 679 at 698.

[50] National Commercial Banking Corporation of Australia Ltd v Batty [1986] HCA 21; (1986) 160 C.L.R. 251 at 263, per Gibbs, C.J. and at 273, per Brennan, J.; see too, Cheques Act 1986, ss.62, 66, 77 and 95.

[51] Tam ah Sam v Chartered Bank (1971) 45 A.L.J. 770; Paget's Law of Banking 12th Ed. at [22.2].

[52] See, for example, Scott v Davis (2000) 204 C.L.R. 333 at 436[301], per Hayne, J.; Hollis v Vabu Pty Ltd [2001] HCA 44; (2001) 207 C.L.R. 21 at 40 [43] et seq., per Gleeson, Gaudron, Gummow, Kirby and Hayne, JJ.

[53] Hollis v Vabu Pty Ltd ibid.

[54] Bowtead, & Reynolds on Agency 16th Ed. at [8-174];

[55] See Atiyah, Vicarious Liability in the Law of Torts, at 292-3, and the cases there cited.

[56] (1850) 4 Exch. 729; 154 E.R. 1409.

[57] Scott v Davis (2000) 204 C.L.R. 333 at 388[168], per Gummow, J.

[58] Thompson v Australian Capital Television Pty Ltd [1996] HCA 38; (1996) 186 C.L.R. 574 at 580.

[59] Glanville Williams, Criminal Law, The General Part, 2nd Ed. at 349-350[120]

[60] Parsons v Loyd (1772) 3 Wils 341 [1799] EngR 321; (1772) 95 E.R. 1089; Codrington v Lloyd [1839] EngR 751; (1839) 8 Ad & El 449; Collett v Foster (1857) 2 H & N 356; Clissold v Cratchley [1910] 2 K.B. 224 (CA); Atiyah, Vicarious Liability at 306.

[61] Atiyah, Vicarious Liability, at 289.

[62] Cf. Cowell v Corrective Services (1988) 13 N.S.W.L.R. 714 at 735.

[63] (1876) L.R. 1 Q.B.D. 31.

[64] [1914] HCA 83; (1914) 19 C.L.R. 457 at 476. (My emphasis)

[65] See also Weaver & Craigie, The Law of Banker and Customer in Australia, at [9.7950].

[66] Port of Brisbane Corporation v ANZ Securities Ltd (No 2) [2002] 2 Qd. R. 661.

[67] In re Montagu's Settlement Trusts [1987] Ch. 264.

[68] [2002] 2 Qd. R. 661 at 672.

[69] [1929] 1 K.B. 40.

[70] [1929] A.C. 176 at 182.