Banking law

Indemnity for loss

Linklaters v HSBC Bank plc and Banco Popular Espaol [2003] EWHC 1113 (Comm)

This case concerned the division of responsibility between two banks for the costs of a settlement following a cheque fraud.

It approves the decision in Middle Temple v Lloyds Bank [1999] 1 All ER (Comm) 193 - circumstances in which an agent is entitled to an indemnity for loss caused in the performance of a principal's instructions.

In Linklaters, Zeneca Limited drew a cheque for 989,112 on its account at a Manchester branch of the HSBC Bank (HSBC).

The payee was Linklaters.

The cheque was validly signed and was crossed 'A/C PAYEE ONLY'.

It was thought that the cheque was stolen from City law firm Linklaters' post room.

An Italian national subsequently obtained the cheque, which now contained a forged endorsement in blank from Linklaters.

He then opened an account in the name of a Puerto Rican company, United Financial Services Corporation (UFSC), at the Las Palmas branch of Banco Popular Espaol (BPE) and directed that the proceeds of the cheque be collected into UFSC's account.

BPE sent the cheque to the relevant Manchester branch of HSBC along with a remittance letter stating that the cheque was being collected for UFSC.

Among other things, in the remittance letter BPE instructed HSBC after payment to credit the proceeds to BPE's account at HSBC's London office.

BPE therefore acted as the collecting bank for UFSC in relation to the cheque.

HSBC acted as both BPE's agent for collection and also the paying bank.

Two members of HSBC's staff reviewed the cheque, and it was authorised for settlement.

The proceeds of the cheque were credited to BPE's account at HSBC's London office.

BPE then credited the proceeds to UFSC's account.

Over a short period of time the entire value of the proceeds of the cheque were withdrawn from UFSC's account.

Linklaters reported that it had not received the proceeds of Zeneca's cheque and the theft of the cheque was subsequently discovered.

None of the money withdrawn from the Las Palmas branch of UFSC has been recovered.

Linklaters sued both HSBC and BPE in conversion.

Both banks settled Linklaters' claim; the degree of responsibility between the banks for the costs of the settlement then had to be determined.

HSBC claimed that it was entitled to an indemnity and/or warranty from BPE in respect of the claim brought by Linklaters, the effect of which was to render BPE solely liable.

HSBC's argument was based on the decision of Mr Justice Rix in Middle Temple v Lloyds Bank.

BPE sought to argue that Middle Temple was wrongly decided, per incuriam and distinguishable and that in consequence there was no basis for HSBC claiming the benefit of an indemnity or a warranty.

In the event that the indemnity and/or warranty issues were decided against HSBC, both parties argued for a contribution in their favour pursuant to the Civil Liability (Contribution) Act 1978.

In the Middle Temple case, a distinction was drawn between an agent's breach of duty vis--vis his principal and an agent's breach of duty to a third party.

Where an agent for a collecting bank was negligent towards a third party payee, he would be entitled in general to an indemnity from a collecting bank for any loss caused to a third party as a consequence of performing the collecting bank's request.

This was not the case where the loss was caused by the agent's negligence in the actual performance of the collecting bank's request.

BPE sought to argue that this distinction was incorrect and decided per incuriam.

BPE's position was that the agent of a collecting bank was not entitled to claim an indemnity against the collecting bank even in circumstances where loss to a third party payee arose as a direct and natural consequence of the agent's performance of the collecting bank's request.

In support of this contention, BPE relied upon a passage from Bowstead & Reynolds on Agency (17th edition) Article 85 and related commentary at paragraph 7-065, where it is stated that 'where the expenses and liabilities only arise because of the agent's fault, it is obvious that there is no liability to indemnify'.

Mr Justice Gross held that the decision of the court in the Middle Temple case was neither incorrect nor per incuriam on this issue.

In reaching this conclusion, the judge emphasised the word 'only' in the passage cited above as important to an understanding that an indemnity would in general only be available only where the natural and direct consequence of an agent carrying out his principal's request would be loss to a third party.

If loss was caused to a third party only as a consequence of the agent's negligence in performing his principal's request, then no indemnity was available.

On the facts of this case the natural consequence of HSBC following the instructions in the remittance letter would be loss to Linklaters.

Accordingly HSBC was entitled to a complete indemnity from BPE.

BPE also challenged the correctness in law of the proposition advanced in the Middle Temple case, that where a bank asks its English agent for collection to collect English cheques crossed 'a/c payee' it is impliedly warranting that its customer is entitled to the proceeds.

The judge rejected BPE's argument on this point.

After having reached the conclusion that Middle Temple was neither decided wrongly nor per incuriam, the judge dealt with BPE's submissions that the case was distinguishable.

This proposition was also rejected.

It made no difference that in this case HSBC was both the agent for collection and, in addition to the position in Middle Temple, the paying bank.

Accordingly, BPE were found to be liable to HSBC for a complete indemnity in respect of HSBC's liability in conversion to Linklaters.

Having reached this conclusion it was not strictly necessary for the judge to deal with the issue of contribution.

Nevertheless the judge found that if he had not found for HSBC on the indemnity and warranty issues, he would have assessed contribution on the basis that BPE's responsibility for the damage was two-thirds and HSBC's one-third.

The decision in this case confirms and strengthens the Middle Temple decision.

It can also be said to be subject to the same type of criticism levelled against Middle Temple, in that even though HSBC's responsibility for loss assessed on a contribution basis would have been one-third, it was nevertheless entitled to a complete indemnity from BPE.

Any perceived harshness in this conclusion was mitigated by banking practice that it was the duty of the collecting bank 'to ensure that it was collecting for the right customer and true owner' and that certainty in risk allocation was preferable to the uncertainty of costly litigation on the issue of apportionment of loss.

On a more general level, the case provides clarity on the circumstances in which an agent is entitled to claim an indemnity when loss is caused in the performance of a principal's instructions.

By Simon Sugar, barrister, 36 Bedford Row, London