° a ~ > QBD Barclays Bank plc v Quincecare Ltd 363 Barclays Bank plc v Quincecare Ltd and another QUEEN'S BENCH DIVISION (COMMERCIAL COURT) STEYN J 18-21, 25-28 JANUARY, I, 2, 4, 5, 24 FEBRUARY 1988 Bank — Banker/client relationship ~ Duty of bank ~ Execution of customer’s orders — Drawing and payment of customer's cheques — Bank’s duty to exercise reasonable skill and care ~ Order for transfer of misappropriated funds — Customer arranging bank loan to company controlled by him ~ Customer requesting bank to transfer funds to unknowing {firm of solicitors — Customer instructing solicitors to transfer money to United States — ‘Customer absconding to United States and misappropriating money — Bank suing company and guarantor for return of money ~ Whether bank under duty to make inquiries before transferring money to solicitors ~ Whether bank having reasonable grounds for believing that customer’s order was attempt to misappropriate funds. S approached the plaintiff bank for a loan of £400,000 to finance the purchase of four chemists shops. The bank agreed in principle to a fixed-term loan of £400,000 repayable over ten years provided it was made to a new company formed by S, that the directors of the new company injected {50,000 capital into the new business and that the loan was guaranteed by the second defendant, a major supplier of pharmaceutical products throughout the United Kingdom, as guarantor. The guarantor agreed to guarantee the loan provided the company used it as its principal supplier of pharmaceutical products and undertook to buy not less than 70% of its annual purchases from it. The guarantor signed an ‘all moneys guarantee’, with a limit of £400,000 and when returning the guarantee to the bank stated ina letter that it accepted the bank’s standard form of guarantee on the absolute understanding that it only related to the fixed-term loan of £400,000 repayable over ten years and did not extend to any other bank accounts whatsoever. S formed a new company, the first defendant, and when the loan was approved he requested the bank to transfer £344,840 to a firm of solicitors who had acted for him before and who he said were acting for the first defendant although they had not acted in the purchase of the four shops and in fact knew nothing about the transaction. $ had previously arranged with the solicitors to receive a large sum on his behalf and to transfer it to an account in the United States. $ then absconded to the United States, where he misappropriated the money. The bank sued both the company and the guarantor to recover the amount misappropriated and interest. The company contended, inter alia, that the bank had acted in breach of the implied duty of care in the customer/banker relationship because the circumstances of the transfer had been such that they would have raised questions in the mind of a reasonable banker as to whether the transaction was in fact truly authorised by the customer and for the customer's benefit thereby putting the banker under a duty of inquiry and that by making no inquiry the bank had been negligent. Held - The relationship between a banker and a customer quoad the drawing and payment of the customer's cheques against the money of the customer's in the banker’s hands was that of principal and agent and as an agent the bank owed fiduciary duties to the customer and prima facie was also bound to exercise reasonable care and skill in carrying out the instructions of its principal.364 All England Law Reports [1992] 4 AIlER Accordingly, it was an implied term of the contract between the bank and the customer that the bank would observe reasonable skill and care in and about executing the customer's orders but generally that duty was subordinate to the bank's other conflicting contractual duties, such as its prima facie duty when it received a valid and proper order to execute the order promptly on pain of incurring liability for consequential loss to the customer. If the bank executed the order knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make, the bank would plainly be liable. Furthermore, a banker was under a duty to refrain from executing an order if and for as long as. he was put on inquiry in the sense that he had reasonable grounds (although not necessarily proof) for believing that the order was an attempt to misappropriate funds. On the facts, and having regard to the fact that the basis of the banker/ » customer relationship had to be trust rather than distrust, there was nothing in © the history of the loan transaction which should have put the bank on ingu \iry as to S's honesty. In any event any inquiries made by the bank of the firm of solicitors nominated by S to receive the money would not have revealed the fraud as they were unaware of the loan transaction. At all material times the money transferred was in an ordinary current account and therefore no question of trust moneys was involved and no issue of knowing receipt arose nor any question of assisting a breach of trust since there was no want of probity on the part of the bank. It followed that the bank was entitled to judgment against the defendants (see p 375 ¢dhto p 376actoegh, p 377 ef, p 380h, p 381 c toe and p 384 de, post). Dicta of Bowen LJ in Sanders Bros v Maclean é& Co (1883) 11 QBD 327 at 343 and of Alliott in Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4 All ER 331 at 349 applied. Notes For a banker's duty when paying cheques, see 3(1) Halsbury’s Laws (4th edn reissue) paras 163~i90, and for cases on the subject, see 3 Digest (Reissue) 614— 631, 3885-3957. Cases referred to in judgment Groves-Raffin Construction Ltd v Bank of Nova Scotia [1976] 1 Lloyd’s Rep 373, BC sc. Karak Rubber Co Ltd v Burden (No 2)[1972] 1 AIl ER 1210, [1972] 1 WLR 602. Lipkin Gorman (a firm) v Karpnale Ltd (1986) [1992] 4 All ER 331, [1987] 1 WLR 987. Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571, [1979] Ch 384, [1978] 3 WLR 167. Montagu’s Settlement Trusts, Re, Duke of Manchester v National Westminster Bank Ltd (1985) [1992] 4 All ER 308, [1987] Ch 264, [1987] 2 WLR 1192. Sanders Bros v Maclean & Co (1883) 11 QBD 327, CA. Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073, [1968] 1 WLR 1555. Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80, [1985] 3 WLR 317, PC. Westminster Bank Ltd v Hilton (1926) 43 TLR 124, HL. Action By writ dated 10 February 1985 Barclays Bank ple claimed against Quincecare Ltd and UniChem Ltd for damages of £400,000 plus interest of £229,846 being the ® ~QBD Barclays Bank plc v Quincecare Ltd (Steyn J) 365 amount lent to the first defendant under a fixed term loan, which loan was guaranteed by the second defendant, The facts are set out in the judgment. ® Timothy Walker QC and G Caws (instructed by Durrant Piesse) for the plaintiff. Roydon Thomas QC and Simon Browne-Wilkinson (instructed by Warner Cranston) for the first defendant. Martin Mann QC and Roger Kaye (instructed by Rakisons) for the second defendant. Cur adv vult 24 February 1988. The following judgment was delivered. STEYNJ. INTRODUCTION The bare essentials of this case can be stated in summary form. A bank agreed to lend £400,000 to a company formed to purchase four chemists shops. The chairman of the new company caused a sum of about £340,000 to be drawn down and to be misapplied for his dishonest purposes. Almost the entire sum was lost. The bank sued the company (Quincecare Ltd), the principal debtor, and a guarantor (UniChem). Both the principal debtor and the guarantor defended the claim, and put forward counterclaims. The central issues related to the question whether the bank acted in breach of duty towards the principal debtor, or towards the guarantor. It is common ground that the principal debtor is insolvent, and that the appearance of the principal debtor by leading and junior counsel at the trial was funded by the guarantor for tactical reasons. To the extent that liability of the principal debtor and the guarantor is coextensive, the guarantor relies on defences which avail the principal debtor, and in addition puts forward independent defences. The resolution of these issues will determine the answer to the question: upon which innocent party should the loss caused by the chairman’s dishonesty fall? Together with interest to 7 January 1988 the sum claimed against the principal debtor and UniChem (the guarantor) is £669,846. The convenient way of approaching this matter is first to sketch the background, then to examine defences pleaded by Quincecare and finally to consider independent defences pleaded by UniChem. At the risk of oversimplifying, but in order to provide a framework for a sketch of the background, I record at once that the most substantial issue in the case is whether the bank, in executing the order to transfer the money, were put on inquiry that the chairman was acting for his own benefit or, in any event,for an unauthorised purpose. It is, therefore, necessary to examine the contemporary A documents, and the oral evidence, with considerable care. Q ® ~ ry ‘THE BACKGROUND In this section I will set out the story in broad outline as it appears from the contemporary documents, and from the oral evidence which was either common , ground or incontrovertibly established. The genesis of the action is a successful J fraud perpetrated by Mr Harry Stiller in January 1984 when Mr Stiller caused £344,840 of money lent by Barclays Bank plc, through its branch at Beverley Hill Road, Hull, to a company formed for the purchase of four chemists shops, to be transferred for his benefit to the United States. In December 1985 at the Crown Court at York Mr Stiller pleaded not guilty to various charges. During the course of the trial he changed his plea to guilty on one count of obtaining property by366 All England Law Reports [1992] 4 AIlER deception. He was sentenced to four years’ imprisonment. Very little is known about his background. He had worked asa salesman both in this country and, for some years, in the United States. In 1982 he was involved in a business venture called Pennysaver, which specialised in selling very cheap goods. It had branches in Newcastle upon Tyne, Stockton and Scarborough. The business was owned by Manygill Ltd, the alter ego of Mr Stiller. His associates were Mr Plater, who was involved in the day-to-day running of the shops, and Mr Austin Elliott, a chartered accountant, who acted as accountant to Manygill. Mr Peter Yeales, an English solicitor, acted for Manygill in some matters. From September 1982 Manygill had a current account at the Hull branch of Barclays Bank. Mr Stiller had dealings principally with two senior bank employees at the Hull branch, namely Mr Brian Redhead, the manager, and Mr Paul Tomlinson, the manager's assistant. Apart from his Manygill connection, Mr Elliott was a partner in Parklands Chemists. Parklands owned four chemists shops in Scotland. Parklands had a current account at the branch of Barclays Bank at Tyne Dock, South Shields. Mr Ronald Kemp was the manager of the Tyne Dock branch. By mid-1983 Parklands had property and stocking loans from the bank amounting to more than £400,000. Those loans were guaranteed by UniChem Ltd, the second defendants. UniChem isa major supplier of pharmaceutical products throughout the United Kingdom. It supplied such products to the Parklands chemists shops. By 30 June 1083 UniChem was deferring payment from Parklands for stock to reduce pressure on the Parklands current account at the Tyne Dock branch. The Parklands partners decided to sell the four shops to reduce the borrowing from Tyne Dock branch. It was said that Mr Stiller took the view that the four chemists shops would be a useful adjunct to the Manygill business. Originally, he had in mind that Manygill should buy the four shops. But, in order to buy the four shops he needed a loan of about £400,000 from the Hull branch, and the bank insisted that the purchase should be in the name of a new company. That is how Quincecare Ltd, the first defendants, came into the picture. Mr Stiller had no direct shareholding in Quincecare but 40% of the issued shares were held by the two children of Mr Stiller and Miss Jean Ramassini, Mr Stiller’s common law wife, who also held 20% of the shares in her own name. Mr Plater and Mr Elliott cach held 20% of the shares. Mr Stiller was the chairman of Quincecare, and Mr Plater and Mr Elliott were directors. Mr Stiller had effective control of Quincecare. Mr Stiller approached the Hull branch for a loan of about £400,000 to finance the purchase. Without adequate security the application would never have been considered. But negotiations took place on the basis that UniChem would guarantee the loan. UniChem was regarded by the bank as a most acceptable guarantor. Relying almost entirely on UniChem’s willingness to provide a guarantee the local head office of the plaintiff bank granted approval in principle of the loan subject to two qualifications namely (a) that the directors of Quincecare had to produce £50,000 by way of a cash injection into Quincecare and (b) that a formation statement of Quincecare be produced. In October 1983 the partners in Parklands (including Mr Elliott), and Mr Stiller attended a meeting at the head office of UniChem. UniChem was represented by Mr R Monaghan, the financial director of UniChem, and Mr W Woodgate, the financial director's assistant. The proposed transaction, and the backgrounds of Mr Elliott and Mr Stiller, were examined and discussed in detail. UniChem was satisfied that the transaction was ‘a reasonable proposition’. Subsequently, Mr Woodgate spoke directly to Mr Redhead about the transaction. Ishould explain that Mr Redhead and Mr Tomlinson were under the impression that Mr Woodgate was the financial » ° ~ .QBD Barclays Bank plc v Quincecare Ltd (Steyn J) 367 director of UniChem, and so addressed him in correspondence, and they were never corrected. Mr Woodgate told Mr Redhead that UniChem had done their investigations and were satisfied in principle that the four shops, under new management, would soon be profitable enough to service the advance. Since UniChem specialises in supporting chemists shops by the provision of guarantees, to obtain bank loans, UniChem’s favourable response gave considerable comfort to the bank. In November and December negotiations proceeded. The sellers were represented by Dorrian McAllister & Co, Scottish solicitors, and the seller dealt with Tyne Dock branch. The buyers, that is Quincecare, were represented b} Allan McDougall & Co, Scottish solicitors, and they were looking to the Hull branch for the advance. Burton & Rind, English solicitors, acted on behalf of ¢ UniChem in relation to the obtaining of security from Quincecare and its directors, That security eventually took the form of a debenture over Quincecare’s assets, and personal guarantees by the directors. On 15 November 1983 the Hull branch sent to UniChem a copy of the facility letter which was to be issued to Quincecare, and the bank’s standard form guarantee for signature by UniChem. On 15 November the facility letter was signed on behalf of the bank by the d manager of the Hull branch, and on 22 November 1983 it was signed on behalf of Quincecare by Mr Stiller. It records that the bank agreed to provide a medium term loan of £400,000 to Quincecare for a period of ten years. Clause 1 specified that the purpose of the loan was to assist Quincecare with the purchase of four chemists shops. It was incontrovertibly established, however, that all concerned contemplated that part of the advance would be to pay for stock. At this stage I draw attention to only two clauses of the facility letter: ® “3. Guarantee The repayment of the Borrower's obligations hereunder will be guaranteed on the Bank’s standard form by UniChem Limited (“the Guarantor”) in the principal sum of £400,000 and interest and other monies as detailed therein. f 4. Drawdown Following completion of the guarantee, as detailed in clause 3 above and of the acceptance formalities detailed in clause 14 below, the Loan will be available for drawing in a single tranche by 5 January 1984, after which date the Bank’s commitment to provide the Loan shall lapse. The Borrower shall give the branch manager at this branch of the Bank two business days’ notice of the intention to draw.’ It was common ground that the date of drawdown mentioned in cl 4 was subsequently extended but nothing turns on that point. Departing from the chronology, it must be pointed out that the guarantee was only signed by UniChem on 29 December 1983, and returned to the Hull branch under cover of the letter of the same date. The guarantee is in standard form. It +f was described as an ‘all moneys guarantee’, with a limit of £400,000. The accompanying letter is of significance. It was addressed by Mr Woodgate of UniChem to Mr Tomlinson of the Hull branch. It reads as follows: “Quincecare Limited . Referring to the telephone conversation we had yesterday, and also your 4 letter dated 15 November with enclosures, 1am now able to return the Bank’s Guarantee Form duly executed by UniChem Limited in connection with the above named Company. Although we have accepted the Bank's standard Form of Guarantee it is on the absolute understanding that it only relates to the Fixed Term Loan Account of368 All England Law Reports [1992] 4 AIlER £400,000 repayable over ten years, and does not extend to any other bank accounts whatsoever notwithstanding what is contained in the copy Facility Letter, the receipt of which we formally acknowledge. The policy of UniChem in giving guarantees in one whereby under no circumstances are we prepared to enter into any type of overdraft commitment. Therefore, we would expect our liability, in the case of Quincecare Limited, to be of a diminishing nature corresponding with the agreed repayment terms. As it will form part of the amount we are required t0 disclose in our own published Report and Accounts under the heading of contingent liabilities it would be much appreciated if you can advise us, as at the close of business on the 31 December each year, of the sum outstanding in connection with the Guarantee to include both Principal and Interest. I should appreciate being informed directly the Loan of £400,000 has been drawn by the Company in view of certain negotiations currently taking place between us and Barclays Tyne Dock branch. For your information, UniChem Limited is a Society registered under the Industrial and Provident Societies Acts. If can provide any further assistance then I should be happy to do so upon hearing from you.’ (My emphasis.) It is common ground that the first sentence of the second paragraph has contractual effect: in other words, the ‘all moneys’ standard form guarantee became a guarantee only in respect of the fixed term loan of £400,000. In the meantime, in mid-November 1983 Quincecare had commenced trading from the four chemists shops despite the fact that the purchase price had not finally been agreed and that no part of the purchase price had been paid. At all material times both the bank and UniChem were aware of the position. On 18 November Mr Stiller and Mr Elliott signed a form appointing Barclays Bank as bankers of Quincecare. On 21 November a current account was opened by Quincecare at the Hull branch. Mr Stiller was anxious to draw down the loan but it was made perfectly clear that no drawdown could take place until the UniChem guarantee, duly completed, had been received by the Hull branch. UniChem expected the purchase price of the four shops to be used to reduce the Parklands overdraft liability, which UniChem had guaranteed, thereby releasing UniChem from liability under the guarantee held by the Tyne Dock branch. But Parklands required bridging finance. On 29 December 1983 UniChem advanced £282,993-71 by way of bridging finance to Parklands. UniChem, it will be recalled, signed the guarantee on 29 December, and forwarded it under cover of a letter of the same date to the Hull branch. On the next day UniChem, Quincecare and the four directors of Quincecare (Stiller, Ramassini, Elliott and Plater) executed a deed. 1 will refer to it as the ‘trading agreement. The trading agreement imposed on Quincecare the obligation to use UniChem as its principal supplier of pharmaceutical products, and Quincecare undertook to buy not less than 70% of its annual purchases from UniChem. The directors guaranteed performance and observance of the terms of the trading agreement. The execution of the trading agreement was UniChem’s motivation for agreeing to furnish a guarantee to the bank. UniChem was not prepared itself to advance the money to Quincecare, and the furnishing of the UniChem guarantee was an indispensable requirement of the bank before it would allow a drawdown of the loan. On Wednesday, 4 January 1984 the UniChem guarantee was received by the Hull branch. Mr Tomlinson dealt with the matter. He phoned Mr Stiller and informed him that an acceptable guarantee had been received. He accepted an oral notice of drawdown of the loan. But he pointed out to Mr Stiller that the °QBD Barclays Bank pic v Quincecare Ltd (Steyn J) 369 bank had one outstanding requirement, viz an assurance that the £50,000 cash @ injection by the directors had taken place. Mr Stiller undertook to attend to the matter. He phoned Mr Elliott. At Mr Stiller's request Mr Elliott phoned Mr Tomlinson on 4 January and read to him a letter which he was sending to the Hull branch about the capitalisation of Quincecare. Subsequently, the letter itself was received. It is a curious document, and the defendants placed great emphasis on it, but it will be more convenient to quote it when I come to consider the 5 substantive issues. It is sufficient at this stage to record that Mr Tomlinson regarded the letter as an assurance from a chartered accountant, albeit one with a foot in the camps of the sellers and buyers, that the {(50,000 capitalisation had taken place. As far as the Hull branch was concerned the final obstacle to the drawdown had been removed. In the execution of his fraudulent design Mr Stiller phoned Mr Kenyon, of Philip Evans & Co, a Bournemouth firm of solicitors. Mr Stiller had family in Bournemouth, and he had a substantial connection with Bournemouth. And Mr Kenyon had previously acted for him. Relying on Mr Kenyon’s evidence, | find that Mr Stiller asked him to act for him in connection with the purchase of the chemists shops, and asked him to receive a large sum in a client account, to d Place it on deposit over the weekend and to transfer it to the United States early in the next week upon Mr Stiller's instructions. Mr Kenyon was worried about Mr Stiller's own position but he was told that solicitors were looking after Mr Stiller's interests. Mr Kenyon agreed to the request, and was prepared to await further instructions from Mr Stiller during the following week when Mr Stiller promised to come and see Mr Kenyon. Mr Kenyon instructed Mrs Jean Mitchell, @ acashier in the firm, to act in accordance with Mr Stiller’s instruction if he should phone. On Friday, 6 January 1984 Mr Stiller phoned the Hull branch, and spoke to Mr Tomlinson. He asked Mr Tomlinson to transfer (344,840 to Philip Evans & Co and £24,237 to Manygill Ltd; the latter he described as an inter-company debt. Mr Tomlinson told Mr Stiller that he required written confirmation of the order. When Mr Stiller insisted that he should carry out the order immediately Mr Tomlinson offered to speak to Mr Redhead. But Mr Redhead also insisted on written confirmation of the order. The confirmation in the form ofa letter dated 6 January 1984 was delivered by Mr Paul Abbey, a driver who worked for Mr Stiller, at some time during the course of that afternoon. There was an issue g % (© whether the confirmation was received before or after the order was executed. I will examine the evidence on that issue when I come to consider the arguments advanced on behalf of the defendants. The letter was written on the letterhead of ‘Manygill Ltd trading as Pennysaver’. It was addressed to Mr Tomlinson, and simply signed ‘Harry Stiller’. The letter read as follows: h “As per our telephone conversation today at 2 p.m. I would confirm my instructions to you as follows. (1) Send to Philip Evans & Co by Telegraph, £344,840'00 at Barclays Bank p.l.c. 48 Holdenhurst Road Bournemouth Dorset Clients A/c No. 90353701. And debit this amount to Quincecare Ltd. Ajc No. 10727210. (2) Transfer the sum of £2.4,237700 from Quincecare Ltd to Manygill Ltd., This being the inter Company debt, now retired. Please 7 accept this letter as my confirmation of my telephone instructions of today.” The transfer was done by Mrs Jill Steer and Mr Robin Mumby, bank employees in the securities department of the Hull branch. Instructions were given for the transfer by 2.40 pm. And the actual transfer was effected between 2.55 pm and 3.07 pm. The transfer was effected through local head offices but the details do370 All England Law Reports [1992] 4 AER not matter. It is sufficient to say that Mrs Mitchell, the cashier in the offices of Philip Evans & Co, was phoned by the receiving bank (Barclays Bank, Bournemouth). She ascertained from Mr Kenyon what it was about and then also spoke to Mr Stiller. She opened a ledger card in the name of Mr Stiller with ‘£344,840 shown as the credit, and arranged for the money to be placed on deposit over the weekend. It will be recalled that in the letter of 29 December Mr Woodgate had asked Mr Tomlinson to let him know ‘directly the loan of £400,000 has been drawn down’, Mr Tomlinson phoned Mr Woodgate on Friday, 6 January, and told him that £344,840 had been transferred to Quincecare’s solicitors, Philip Evans & Co of Bournemouth. Mr Woodgate simply said: ‘Oh, I see. No doubt it will all filter through.’ On Tuesday, ro January 1984, on Mr Stiller's instructions, £341,400 was transferred by the cashier of Philip Evans & Co for the credit of Thomas Doran Account No 11006361 49/65 at Manufacturers Hanover Trust, 866 Third Avenue, New York. Mr Stiller then disappeared. He had successfully cheated the bank, UniChem and his co-directors, Mr Elliott and Mr Plater. The bank only discovered the fraud when on 18 January Mr Plater inquired where the £344,848 had been transferred. The bank in turn contacted Mr Elliot and it became clear that Mr Stiller had misappropriated the money. A sum of about £9,000 was subsequently recovered in the United States. Quincecare sued Mr Stiller and signed judgment against him for £344,848 but that judgment is unsatisfied. And, as I have said, Quincecare is insolvent. Relying on the guarantee, the bank sought payment from UniChem of £400,000. UniChem refused to pay. On 10 February 1985 the bank commenced the present proceedings against Quincecare and UniChem. THE WITNESSES In many Commercial Court cases the documents are of crucial importance, and the oral evidence is only of secondary importance in filling gaps. This isa different kind of case. The oral evidence of the witnesses is of critical importance. Nevertheless, it will add greatly to the length of this judgment, if I summarised the evidence of the witnesses. instead I will consider their evidence in relation to the issues. But it is right that I should record my impression of the merits and demerits of the witnesses. The bank called two principal witnesses: (a) Mr Redhead, the manager of the Hull branch, who has occupied that position for 14 years, and has 37 years banking experience; (b) Mr Tomlinson, the manager's assistant. He has worked for the bank for 27 years. The honesty of neither Mr Redhead nor Mr Tomlinson was impugned. Both were manifestly honest and reliable witnesses. Moreover, both impressed me as cautious and careful banking officials. I accept their evidence. The bank also called Mrs Steer, an employee in the securities department. Her role was less important. But her evidence was reliable and I accept it. Now, I turn to the witnesses called by Quincecare. Mr Elliott and Mr Plater— two Quincecare directors—are liable to UniChem on personal guarantees. It is in their interest that the claim against UniChem should fail. Both, and particularly Mr Plater, were unable to overcome an unconscious bias in favour of UniChem. Where their evidence is in conflict with the evidence of banking witnesses, or the picture which otherwise emerges from the documents, I reject their evidence. Quincecare also called Mr Kenyon, the solicitor, and Mrs Mitchell, the cashier. Both were trustworthy witnesses. I accept their evidence as reliable save that I have to record that Mr Kenyon’s recollection of his conversations with Mr Stiller,asp Barclays Bank ple v Quincecare Ltd (Steyn J) 371 which was unaided by a note, was poor. Quincecare also called Mr Abbey, the driver, to testify as to the time of his arrival at the bank on 6 January. For reasons which I will set out in due course, I reject his evidence as not worthy of credence. Finally, Quincecare called Mr Stiller. It does not follow from the fact that he committed a major fraud that he cannot be believed. Some of his evidence was uncontroversial and can readily be accepted. But at times, and particularly when he was cross-examined on previous statements, he revealed a reckless disregard of the truth. On critical points, where his evidence is unsupported, I can place no reliance on his evidence. Ultimately, UniChem called no witnesses. That was surprising and particularly so because UniChem applied in 1986 for Mr Monaghan and Mr Woodgate to be examined before an examiner. They were so examined but their evidence was not placed before the court and, although they were available, they were not called, In an affidavit sworn by UniChem’s secretary on 7 March 1986 the importance of their evidence was described as follows: “4. Walter John Woodgate of Ivory Lodge, 76 Hayes Lane, Kenley, Surrey and Raymond Gerard Monaghan of 12 Woodbury Close, East Croydon, Surrey are material and necessary witnesses for the Second Defendant to support its defence to this action as I am advised and verily believe and the Second Defendants cannot safely proceed to the trial thereof or properly support such defence at the trial without their evidence. 5. Walter John Woodgate was employed by the Second Defendants as Assistant Secretary. He was intimately involved with the case by reason of correspondence, telephone calls, and meeting with many of the parties, and in particular with Mr Redhead and Mr Tomlinson, employees of the Plaintiff Company. He was responsible for the legal and other arrangements for the Joan and the Guarantee, 6. Raymond Gerard Monaghan was employed as Finance Director of the Second Defendants. He was involved in the transaction throughout, and was responsible for the original negotiations with the First Defendants, leading to the agreement to enter into the loan and Guarantee . ..” If these witnesses had been called they would have been able to throw further light on the depth of UniChem’s investigations of the transaction, and the reasons why UniChem was prepared to enter into the transaction with less than complete security arrangements. To the extent that there runs through UniChem’s arguments the refrain that ‘the bank failed to have regard to UniChem’s interests’ the evidence of Mr Monaghan and Mr Woodgate may well have served to underline the inference, which is in my view justified on the evidence, that UniChem is well versed in the business of risk taking, by the giving of guarantees, and was quite capable of evaluating the risks involved and regarded them as acceptable. Finally, I should explain that at the trial both the bank and Quincecare obtained leave to call expert evidence. Eventually, on counsel’s advice, no expert evidence was called. That was, if I may say so, a sensible decision in a case such as the present since expert evidence would simply have introduced yet another way of rehearsing the same arguments. THE ALLEGED BREACH OF MANDATE On behalf of Quincecare Mr Thomas QC submitted that the bank made the transfer without instructions and that Quincecare therefore incurred no liability to the bank. Mr Mann QC adopted these submissions on behalf of UniChem, relying on the principle that generally speaking the liability of the principal372 All England Law Reports [1992] 4 AIlER debtor and the guarantor is coextensive. Mr Thomas submitted that, subject to any question of ratification, the bank is not entitled to claim from Quincecare any payments made out of the account of Quincecare which were made by the bank without instructions in accordance with the terms of the mandate provided by Quincecare to the bank. It is common ground that the only relevant provision of the general mandate dated 18 November 1983 is the provision authorising the bank to comply with orders given on behalf of the company provided that such orders are signed by ‘Any two executive Directors or Chairman alone’. It is submitted, and 1 accept, that the general mandate contemplates a written order. Then there is a special facility mandate, dated 22 November 1983, which authorised the bank to act in all matters relating to the Joan upon instructions from the company signed in accordance with the bank’s mandate for Quincecare’s account with the bank. Again, it is submitted, and I accept, a written order is contemplated. Finally, reliance is placed on the provision in the facility letter that the borrowers shall give to the bank two business days’ notice of intention to draw down. Against this background I now turn to the submissions that the transfer of money was made in breach of mandate. The notice of drawdown was not in writing The stipulation for two days’ notice of intention to draw down is plainly a provision for the benefit of the bank. It was designed to give the bank’s treasury department an opportunity to arrange finance for the advance, which, of course, was one of many calls on the bank’s lending ability. It was rightly conceded that the bank was entitled to waive the stipulation as to 48 hours’ notice. Yet it was maintained that there had to be written notice of drawdown. I will assume, without deciding, that notice of drawdown had to be in writing. If notice of drawdown had to be in writing, the bank could waive compliance with that requirement. And, in my judgment the bank did waive it by executing the order of 6 January 1984. The transfer was not made pursuant to written instructions This issue raises a factual dispute. The question is whether the transfer was executed before or after written instructions (in the form of Mr Stiller's letter of 6 January) were received. The defendants point to a contemporary document which shows that Mr Mumby received instructions to transfer the money at 2.40 pm. They draw attention to the fact that Mr Stiller’s letter of 6 January records the telephone conversation between him and Mr Tomlinson as having taken place at 2 pm. Scarborough, where Mr Stiller lived, is about an hour's drive by car from the Hull branch, And Mr Stiller had to write the letter and to give instructions to Mr Paul Abbey, the driver, to take the letters to the bank. Mr Abbey testified that he had been to the bank three or four times to deliver documents. A leading question in examination-in-chief then directed his attention to Friday, 6 January. He said that on that day he did his last job for Mr Stiller. He left Scarborough with the letters at about 2.25 pm and arrived at the bank when it was closing, which puts his time of arrival at about 3.30 pm. If Laccept this evidence, it would follow that the bank made the transfer without written instructions from Quincecare. Mr Abbey was in custody, when he testified, awaiting trial for an offence involving violence. He has committed a number of offences involving violence. He was a bad witness. In a statement which he made to the police in August 1984 he said that his last job for Mr Stiller was a trip to Northampton. It is nevertheless clear that he did deliver the letter to the bank on 6 January. It is conceivable that on one of his visits he arrived at about closing time. The questionBD Barclays Bank plc v Quincecare Ltd (Steyn J) 373 was when he arrived on 6 January, the date which was suggested to him by the a leading question. On that aspect I reject Mr Abbey's evidence as untrustworthy, and I find that he had in truth no recollection when he arrived at the bank on that day. That is not surprising for he was first interviewed by solicitors on that point in November last year, ie almost four years after a routine visit to a bank to deliver a letter. That left the evidence of Mr Stiller. 1 am satisfied that he had no independent recollection of the time of his conversation with Tomlinson on 6 © January 1984 except that it took place, as he put it, ‘pm’. If it had taken place at, say, 1.30 pm that would have enabled the letter to reach the bank in time for the instructions to transfer the money to be set in motion by 2.40 pm but the defendants rely on the reference in Mr Stiller's letter to the conversation with Tomlinson ‘at 2 pm’ and the internal record of instructions to transfer the money at ‘2.40 pm’. The argument assumes that both timings were absolutely accurate. But I must also have regard to the evidence of Mr Tomlinson. He testified, and I accept, that he was not willing to transfer the money without written instructions; when Mr Stiller insisted, he checked with Mr Redhead; and ‘Mr Redhead instructed him not to transfer the money until written confirmation had been received. Mr Redheads evidence supported Mr Tomlinson. While it d_ was accepted that both Mr Tomlinson and Mr Redhead were honest witnesses, it was argued that Mr Tomlinson disobeyed Mr Redhead, took a chance and transferred the money before the written instructions arrived. If that were the case, one would have thought that Mr Tomlinson would have remembered it because the misappropriation was discovered a few days later. It also seems improbable that Mr Tomlinson would have deliberately disobeyed Mr Redhead, @ and transferred such a large sum of money on an oral instruction conveyed to him by a man who was hardly of enormous substance. And there was no need to do so. There was no emergency: the letter was being dispatched to the bank immediately. In any event, I am satisfied that the evidence of Mr Tomlinson and Mr Redhead is correct. In arriving at this conclusion I have not lost sight of the fact that Mr Tomlinson told the police, and testified at Mr Stiller’s trial, that the telephone conversation took place at about 2 pm. The time was not then an important issue, and Mr Tomlinson’s attention was not directed to the note that instruction to make the transfer were given at 2.40 pm. Either the 2 pm reference in Mr Stiller's letter, or the 2.40 pm reference in the note, or both, are wrong. But I am satisfied beyond any doubt that the money was only transferred after 9 the written confirmation was received. The order was not expressed to be given on behalf of Quincecare Reliance is placed on the wording of the mandate which authorised the bank to comply with ‘orders expressed to be . . . given on behalf of this Company’, the company being Quincecare. Turning to the letter of 6 January, the following hr features are emphasised: (a) the instructions were written on the writing paper of “Manygill Ltd trading as Pennysaver’; (b) Mr Stiller refers to ‘my instructions’; (c) Mr Stiller simply signed his name, and did not state that he was signing on behalf of Quincecare. There was nothing unusual in the use of Pennysaver paper: Mr Stiller used it on other occasions about Quincecare business. Indeed, by 6 January Mr Tomlinson J had never seen Quincecare paper. It was a new company: it was incorporated on 19 October 1983 and the account in its name was only opened on 21 November 1983. And, Mr Tomlinson knew that Mr Stiller was the chairman of Quincecare, and that he was authorised to sign alone on behalf of Quincecare. The written instructions made clear that the account to be debited was Quincecare Ltd and374 All England Law Reports [1992] 4 AIlER quoted the account number. Read against the contextual scene the letter plainly contained instructions given on behalf of Quincecare and nobody else. The transfer was not solely for the purchase of the four shops This argument is based on cl 1 of the facility letter, which provided that the oan was to be used to assist the borrower with the purchase of four chemist shops. It is submitted that the letter of 6 January 1984 did not constitute instructions within the mandate because it divided the £400,000 loan into three parts: (a) (£344,540 to be transferred to Philip Evans & Co; (b) £24,237 to be transferred to Manygill; and (c) the balance to be left in the account. Taking those points in reverse order, the mere fact that the instruction was given to transfer less than the whole sum cannot possibly take the order outside the scope of the mandate. Turning to (b), the loan was always intended to cover the stocking of the shops, and Mr Tomlinson, on what he knew, was entitled to regard the payment to Manygill as referable to an indebtedness relating to stocks supplied by Manygill. In any event, if there had been merit in this point, it would not have served to release the principal debtor and guarantor. It would simply have resulted in a reduction in the bank claim by £24,237. With regard to (a), an instruction to transfer to Quincecare’s solicitors is clearly within the mandate, and, by way of anticipation of later findings, that is how Mr Tomlinson fairly and reasonably interpreted the letter of 6 January. THE ALLEGED BREACH OF DUTY BY THE BANK TOWARDS QUINCECARE. Quincecare’s propositions of law On behalf of Quincecare the following propositions of law were advanced. (i) There is an implied duty of care in the customer/banker relationship. (ii) If the circumstances are such that they would raise questions in the mind of a reasonable banker as to whether the transaction was in fact truly authorised by the customer and for the customer's benefit, then the banker is under a duty of inquiry. (iii) If no inquiry is made then negligence is established. (iv) The quantum of damages is the loss suffered as a result. For these propositions reliance was placed on two well known first instance decisions, Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2. All ER 1073, [1968] 1 WLR 1555 and Karak Rubber Co Ltd v Burden (No 2)[1972]1 All ER 1210, [1972] 1 WLR 602. Those decisions have been followed in Canada: see Groves- Raffin Construction Ltd v Bank of Nova Scotia [1976] 1 Lloyd's Rep 373. It was not submitted on behalf of Quincecare that the bank was a constructive trustee for Quincecare. UniChem did rely on a plea of constructive trusteeship but when I turn to the plea of UniChem it will become clear that it is merely alleged that the bank was a constructive trustee for UniChem on a rather special factual basis. The terrain of the debate regarding the relationship between the bank and Quincecare was simply whether the bank owed to Quincecare a contractual or tortious duty to exercise reasonable care and skill in and about executing an order of Quincecare to transfer money from the Quincecare current account. ‘There isa substantial volume of case law which touches on this branch of law. In Lipkin Gorman (a firm) v Karpnale Ltd (1986) [1992] 4 All ER 331,[1987] 1 WLR 987 Alliott J comprehensively reviewed the authorities which deal with the circumstances in which a constructive trusteeship arises. Ido not intend to traverse the same ground. Alliott J held that the correct approach is ‘that, in given circumstances, a breach of contract on the part of the bank will render it liable as a constructive trustee’ (see [1992] 4 All ER 331 at 341, [1987] 1 WLR 987 at 996-QBD Barclays Bank plc v Quincecare Ltd (Steyn J) 375 997). My partial reservation about that approach is that traditionally equity does @ not intervene unless common law remedies are inadequate. If, in a case such is the present, a bank owes a duty of care, contractual or tortious, to its customer, the common law remedies appear adequate and equity does not usually need to intervene, notably where the claim is for damages. Adopting the reasoning of Megarry V-C in Re Montagu’s Settlement Trusts, Duke of Manchester v National Westminster Bank Ltd (1985) [1992] 4 All ER 308, [1987] Ch 264, Alliott J refused to follow Selangor and Karak insofar as those decisions held that knowledge of circumstances which would put an honest and reasonable man on inquiry is sufficient to create a constructive trusteeship. To that extent, and perhaps because of the imposition of liability in relation to the very complex series of transactions in Selangor, those decisions apparently caused consternation in banking circles (see ¢_ Paget Law of Banking (9th edn, 1982) 225 and Goode Commercial Law (1982) 514) © For the reasons given by Alliott J 1 agree that in relation to both forms of constructive trusteeship, viz knowing receipt and assisting a breach of trust only (@)actual knowledge, (b) wilfully shutting one’s eyes to the obvious or (c) recklessly failing to make appropriate inquiries will bind the conscience and suffice for the purpose of finding a constructive trusteeship established. But it does not, of d course, follow that the common law does not impose more wide-ranging duties on bankers. And that is the question to which I must now turn. In Lipkin Gorman (a firm) v Karpnale Ltd Alliott J considered what a bank's relevant ‘contractual duties’ are towards a customer. He held the following propositions to be established ([1992] 4 All ER 331 at 349, [1987] 1 WLR 987 at 1006): ‘(1) The bank is entitled to treat the customer's mandate at its face value save in extreme cases. (2) The bank is not obliged to question any transaction which is in accordance with the mandate, unless a reasonable banker would have grounds for believing that the authorised signatories are misusing their authority for the purpose of defrauding their principal or otherwise defeating f his true intention. (3) It follows that if a bank does not have reasonable grounds for believing that there is fraud, it must pay. (4) Mere suspicion or unease do not constitute reasonable grounds and are not enough to justify a bank in failing to act in accordance with a mandate. (5) A bank is not required toact as an amateur detective.’ While I have found this approach instructive, the importance of the matter warrants an independent examination of the bank’s duties. My observations are restricted to the relationship of banker and customer in the context of a bank transferring money from a current account on the customer's instructions. But I cannot overlook the fact that on Friday, 6 January 1984 Mr Stiller could have achieved his dishonest purposes by a different means, viz a cheque on the A Quincecare account in favour of Philip Evans & Co. Primarily, the relationship between a banker and customer is that of debtor and creditor. But quoad the drawing and payment of the customer’s cheques as against the money of the customer’s in the banker's hands the relationship is that of principal and agent: see Westminster Bank Ltd v Hilton (1926) 43 TLR 124 at 126 per Lord Atkinson, Similarly, when the bank in the present case acted on an order to transfer by immediate money transfer money from the Quincecare current account to Philip Evans & Co in Bournemouth, the bank was acting as Quincecare’s agent. As agent the bank owed fiduciary duties to Quincecare: see Bowstead on Agency (15th edn) pp 156-160. Prima facie every agent for reward is also bound to exercise reasonable care and skill in carrying out the instructions of his ~376 All England Law Reports [1992] 4 AILER principal: Bowstead p 144, There is no logical or sensible reason for holding that bankers are immune from such an elementary obligation. In my judgment it is an implied term of the contract between the bank and the customer that the bank will observe reasonable skill and care in and about executing the customer's orders. Moreover, notwithstanding what was said in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947 at 957, [1986] AC 80 at 107, a banker may ina case such as the present be sued in tort as well as in contract: see Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571, [1979] Ch 384. But the duties in contract and tort are coextensive, and in the context of the present case nothing turns on the question whether the case is approached as one in contract or tort. Given that the bank owes a legal duty to exercise reasonable care in and about » executing a customer's order to transfer money, it is nevertheless a duty which must generally speaking be subordinate to the bank’s other conflicting contractual duties. Ex hypothesi one is considering a case where the bank received a valid and proper order which it is prima facie bound to execute promptly on pain of incurring liability for consequential loss to the customer. How are these conflicting duties to be reconciled in a case where the customer suffers loss because it is subsequently established that the order to transfer money was an act of misappropriation of money by the director or officer? If the bank executes the order knowing it to be dishonestly given, shutting its eyes to the obvious fact of the dishonesty, or acting recklessly in failing to make such inquiries as an honest and reasonable man would make, no problem arises: the bank will plainly be liable. But in real life such a stark situation seldom arises. The critical question is: what lesser state of knowledge on the part of the bank will oblige the bank to make inquiries as to the legitimacy of the order? In judging where the line is to be drawn there are countervailing policy considerations. The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers. In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company (see proposition (3) in Lipkin Gorman v Karpnale Ltd (1986) [1992] 4 All ER 331 at 349, [1987] 1 WLR 987 at 1006). And, the external standard of the likely perception of an ordinary prudent banker is the governing one. That in my judgment is not too high a standard. Indeed, the evidence of Mr Redhead, a most experienced banker, showed that the principle which I have stated is the very criterion usually applied by bankers. He used the language of a banker being put on inquiry. He explained that if the order had been to transfer £350,000 to a local casino, the money would not have been sent. In this case the bank knew that the funds were required to purchase a business, and the bank expected the funds, or a large part of it, to go to the company’s solicitors. Mr Redhead made clear that if he had reason to suspect the payment to Philip Evans & Co, he would have made further inquiries, and notably from the solicitors. He would, he said, have put up with ~QBD Barclays Bank plc v Quincecare Ltd (Steyn J) 377 the embarrassment, This evidence reinforces my view that the principle which I have stated does not impose too high a duty on a bank. Having stated what appears to me to be the governing principle, it may be useful to consider briefly how one should approach the problem. Everything will no doubt depend on the particular facts of each case. Factors such as the standing of the corporate customer, the bank’s knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features, and the scope and means for making reasonable inquiries may be relevant. But there is one particular factor which will often be decisive. That is the consideration that, in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief. In Sanders Bros v Maclean & Co (1883) 11 QBD 327 at 343 Bowen LJ observed: “But the practice of merchants, it is never superfluous to remark, is not based on the supposition of possible frauds. The object of mercantile usages is to prevent the risk of insolvency, not of fraud; and any one who attempts to follow and understand the law merchant will soon find himself lost if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary is the case. Credit, not distrust, is the basis of commercial dealings; mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of fraud than it is on the supposition of forgery.” That was, of course, a very different case, and the relationship between merchants is very different from the relationship between a banker and a customer. But, it is right to say that trust, not distrust, is also the basis of a bank's dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company. Against this background I must now turn to the facts. Were the bank put on inquiry in the relevant sense? This is an issue of fact. By January 1984 Mr Stiller had been known at the Hull branch for about 16 months. Initially, Mr Redhead was sceptical of Mr Stiller’s statements and intentions but gradually his confidence in Mr Stiller grew. It is clear that by January 1984 Mr Redhead and Mr Tomlinson regarded Mr Stiller as reliable and dependable. That Mr Stiller succeeded in gaining the trust of Mr Redhead and Mr Tomlinson is not altogether surprising. After all, he succeeded in deluding Mr Plater, a company director, and Mr Elliott, a chartered accountant, with whom he worked closely. And he satisfied UniChem in discussions with Mr Monaghan and Mr Woodgate. Moreover, in the witness box he showed himself to be an astute and plausible rogue, with quite an impressive air of gravitas about him. Inevitably, the minutiae of Mr Stiller's dealings with the bank were explored in great detail. Documents in the possession not only of the Hull branch, but also __ of the local head offices at Tyne Dock and Leeds were combed for indications that Mr Stiller was an untrustworthy person, Much hindsight was deployed in this process. Insufficient allowance was made for the fact that in human affairs judgments of character and integrity are notoriously subjective and variable, and banking officials suffer from the same handicap. Moreover, much of the criticism