Barclays Bank Ltd v WJ Simms

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An interesting counterpoint to the recent, eye-catching decision of the New York District Court in Citigroup v Brigade Capital Management, in that it came to more or less the exact opposite conclusion. There is no discharge for value defence in the English law of restitution. A bank who pays its customer’s creditor without instructions to do so does not discharge its customer’s debt and, subject to the usual conditions, can recover the payment from the creditor in an action in restitution.

Facts

The customer made out a cheque to his builder, but then the builder went into receivership. As it was entitled to under the building contract, the customer cancelled cheque before it was presented. The bank paid it anyway, by mistake. Clearly, the bank was not entitled to claim the money from its customer, as it had acted in breach of its instructions, so it claimed the money back from the builder under the principles of restitution. By lucky hap, the case came before Robert Goff J (as he then was), the father of the modern law of restitution. One wonders whether it might have been decided differently in the hands of someone keener on the law of agency.

Decision

Eschewing the opportunity to use the equitable principle of durum caseum per magnos canibus, Robert Goff J (as he then was) found for the bank, and set out his thoughts on the extent of a banker’s obligations to its customers, and the elements of a claim in restitution:

(1) If a person pays money where a mistake of fact is the operating cause of the payment, she is prima facie entitled to recover it as money paid under a mistake of fact.

(2) Her claim may however fail if:

(a) she intended that the payee should have the money anyway, even if the facts were false; or

(b) she made the payment for good consideration, in particular if it discharges a debt the payer (or her principal, if she is an agent) owed to the payee (or his principal, where he is an agent); or

(c) the payee has changed his position in good faith in reliance on the payment.

Robert Goff J (as he then was) wrote in a peculiarly leaden style which, because life is too short, I have edited it for brevity to remove his compulsive demnations and alternative articulations of the same thing:

[after reviewing cases where a bank honours a cheque within its mandate]“In other cases, however, a bank which pays a cheque drawn ... by its customer pays without mandate. A bank does so if, for example [here many fascinating, but irrelevant, examples followed] if it overlooks notice of countermand of the customer. In such cases the bank pays without mandate and, unless the customer ratifies the payment, the bank cannot debit the customer’s account, nor will its payment discharge any obligation of the customer, because the bank had no authority to discharge such obligation.

The judge considered two types of mistaken payment by the bank: (i) where it is mistaken belief that the customer had sufficient funds to meet the cheque when it didn’t; and (ii) where it overlooks notice of countermand given by the customer.

In the first case by making payment the bank effectively accepts the customer’s (implied) request for a loan; the payment is therefore within the bank’s mandate, and the bank has recourse to the customer, but the customer’s obligation to the payee is discharged.

In the second case, however, the bank has no mandate. The bank, therefore, has no recourse to its customer; and the customer’s debt to the payee on the cheque is not discharged.

Prima facie, the bank is entitled to recover the money from the payee, unless the payee has changed his position in good faith, or is deemed in law to have done so.

Robert Goff J seemed rather relieved at this outcome, expressing his basic conviction that, to hell with the law, the right outcome was to give the bank back the money, and let the principals duke it out. This is the non nocere, nulla turpi principle:

“If the bank had not failed to overlook its customer’s instructions, the cheque would have been returned by it marked “Orders not to pay,” and there would have followed a perfectly bona fide dispute between the association [... as to] whether the association was entitled to stop the cheque — which ought to be the real dispute in the case. If the plaintiff bank had been unable to recover the money, [ ... it] would have had no recourse to the association [... meaning] a windfall for the preferred creditors of the defendant company at the plaintiff bank’s expense. As, however, I have held that the money is recoverable, the situation is as it should have been; nobody is harmed, and the true dispute between the association and the receiver can be resolved on its merits.”

The JC says

There is a conundrum at the heart of this decision, in that it depends whether you regard it primarily one of agency or restitution. As the ostensible agent of the debtor, the bank’s performance of the contract ought to bind the principal the same way the direct action of the principal would. But this puts the bank in an invidious position: it has discharged the customer’s debt, but in acting outside its mandate, so the customer is not obliged to reimburse it. But an agent should not become liable as principal. The better approach is to say the sum was not due, so was not obliged to be paid. Therefore it was paid outside the terms of the contract, and restitutionary principles can apply.

This is all complex stuff and requires a bit of sitting on the lavatory and mulling over, especially given obiter statements in Lloyds Bank v Independent Insurance and I might well change my mind about this.

See also

• Durum caseum
• Lloyds Bank v Independent Insurance
• Citigroup v Brigade Capital Management
• Banque Worms v BankAmerica
• Change of position