Commercial law

By Simon Sugar, 36 Bedford Row, London

BankingGovernor and Company of the Bank of Scotland v A Ltd and others [2001] 3 All ER 58This landmark Court of Appeal case has provided long-awaited guidance to banks in circumstances where a customer's account is under suspicion of containing the proceeds of fraud.If a bank discovers information from the criminal intelligence services that suggests the proceeds of fraud may be held in one of its customer's accounts, it is placed on the horns of a dilemma.

If the customer wishes to withdraw funds and the bank accedes to its request, the bank risks liability to a third party for knowingly assisting in a breach of trust.

Alternatively, if the bank refuses to honour its mandate, it risks being sued by its customer.

If a customer were to bring an action in these circumstances, the bank would have no defence unless it revealed the existence of the information obtained from the criminal intelligence services.

However to reveal this information would expose the bank to the risk of prosecution for breaching the statutory prohibition against 'tipping off' contained in section 93D of the Criminal Justice Act 1988.The defendant opened sterling and dollar accounts at the claimant bank.

Substantial sums of money were transferred into these accounts and the bank became suspicious.

The bank communicated with the police and subsequently became aware that investigations were being conducted into activities closely associated with the defendant.

The bank sought the assistance of the court in order to protect its position.Giving the judgment of the court, the Lord Chief Justice, Lord Woolf, stated that the first step for a bank to take when faced with such a dilemma would be to try to resolve the matter with the Serious Fraud Office.

The bank should try to agree with the Serious Fraud Office whether any payments can be made out of the account in question and what if any information can be disclosed about any investigations or suspicions about the money paid into the suspect account.

In the absence of agreement, these issues would have to be determined on an application for interim declaratory relief brought by the bank against the Serious Fraud Office under CPR 25.1(1)(b).

If the customer of the bank brings proceedings, the court stated that it was for the bank to take a commercial decision as to whether to contest the proceedings or not.

If a bank follows the guidance given in this case, it ought to be able to avoid being prosecuted for 'tipping off'.

However the bank will need to act swiftly because the window of opportunity for putting the guidelines into effect may be very short indeed.

Banks will therefore have to ensure that internal procedures are put in place to enable them to deal with these issues as quickly and efficiently as possible.

So far as accessory liability was concerned, Lord Woolf stated that 'it seems almost inconceivable that a bank which takes the initiative in seeking the court's guidance should subsequently be held to have acted dishonestly so as to incur accessory liability'.

However, less clear-cut is the bank's potential liability to its customer.

The commercial decision whether to defend any proceedings brought by its customer will never be an easy decision to make.

On the facts of this case, it transpired eventually that the sums paid into the defendant's account were not tainted by fraud and the bank would ultimately have been unable to defend any action brought against it by its customer.

It seems that while the bank can protect itself against criminal and accessory liability, the best that a bank will be able to do to protect itself from an action brought by its customer will be to seek to contractually exclude relevant liability for loss and damage.

National Westminster Bank Plc v Somer International (UK) Ltd [2001] EWCA Civ 970This case gives guidance on the extent of defence of estoppel by representation when money has been paid by mistake.In this case the defendant was a customer of the claimant bank.

The defendant was in the business of exporting goods.

M Ltd was one of the defendant's customers.

By 1997, M Ltd owed the defendant 166,000.

In April 1997, M paid 100,000 to the defendant and thereafter stated that a further sum in the region of between US$70,000 and US$78,000 would shortly be paid.

The defendant informed the claimant about the further sums likely to be paid by M.As a result of an internal error, the claimant credited the defendant's dollar account in the sum of US$76,708 and wrongly informed the defendant that the further sums that it was expecting had been received.

The defendant, in the belief that M Ltd had reduced its indebtedness, advanced M Ltd goods to the value of 13,180.

On discovering its mistake, the claimant bank sought to recover the sum of US$76,708 from the defendant.The defendant established that the representation made to it by the claimant that the expected dollar payment from M Ltd had arrived gave rise to an estoppel by representation.

The general rule is that the operation of an estoppel by representation would result in the defendant retaining all of the sums mistakenly transferred to it.

The ambit of the exception to the general rule was at the heart of the issues determined on the appeal.

The Court of Appeal held that the harshness of the all-or-nothing effect of the operation of the doctrine of estoppel by representation could be alleviated against where it was unconscionable or inequitable for a party to retain the vast bulk of an overpayment.

On the facts of the case, it was unconscionable for the defendant to retain the balance over and above the value of the goods shipped to M.The judgment in this case appears to be fair to both banks and customers.

Customers will no longer be able to retain windfall benefits over and above any detriment suffered from reliance upon a representation made by a bank.

Furthermore the judgment of the Court of Appeal confirms and provides elucidating authorities for the decisions reached in the cases of Avon County Council v Howlett [1983] 1 WLR 605 and Scottish Equitable Plc v Gordon Derby ILR 7/5/2001.