Brittany Ling, 2015 University of Sussex Mason Hayes Essay prize winner assesses how in Lord Scarman’s judgment in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd, there is much disheartening news for the laws of banking.

In the advent of an ever-increasing attitude of distrust amongst the general population towards the banking industry, it may seem farcical to embark on an analysis of the customer’s duty of care in favor of these instrumental organizations. That said, an analysis of Tai fling Cotton Mill Ltd v Liu Chong Hing Bank Ltd’ (Tai Hing) demonstrates that in relation to responsibilities owed by a customer with regards to his current account, the courts have exhibited a clear reluctance to fmd in favour of banks. In these circumstances, the banks seek to enforce a wider duty of care placed upon its customers, to preclude forged cheques being presented for payment. In this essay, I will embark on an analysis of the current law to provide an over-view of the rules governing the customer’s duty of care, before examining whether customers should be placed under a wider duty of care in relation to their business management.

Development of the customer’s duty of care

The case law has grappled with the idea of burdening the customers of a bank with an extended duty to take reasonable care in their business management, specifically in relation to the prevention of fraud. Indisputably, the law firmly establishes that the customer of a bank owes certain duties of care in relation to the operation of her current account. However, one of the key difficulties in this area and something which Tai Hing sought to address was whether the law as it stands, contained in case law from as early as 1918 and 1933, truly represents the modern commercial banking industry and normal banking practices in today’s climate. No examination of this area of law could exclude an evaluation of London Joint Bank Limited v Macmillan and Arthur (hereinafter Macmillan)². This case represents the authority for the foundation of the bank-customer relationship and a key duty of the customer to exercise reasonable care in relation to drawing cheques so as to not facilitate fraud or forgery.’ In this case the court found in favor of the bank, establishing the first duty of care owed by a customer. Interestingly, the illustration delivered by Lord Finlay of an unlocked warehouse being an omission of

Tai fling Cotton Mill Ltd -v- Liu Chong fling Bank Ltd [1986] AC 80 ² Joint Stock Bank Ltd v MacMillan and Arthur [1918] AC 777. 25 lbid— As per Lord Finlay 789

the “reasonable and ordinary precaution⁴” seems to contradict the duty that the courts place in relation to customers who facilitate forgery by, for example, leaving an open cheque book out. As Lord Finlay appears to assert, the unlocked warehouse is plainly negligent. However, in relation to customers who appear to be ‘negligent’ in relation to the operation of their mandate, the courts have not taken the same approach. Incongruous at it may seem, the courts have restricted the approach in Macmillan to ensuring that reasonable care is taken in relation to the writing of a cheque.⁵

The seminal decision and enunciation of the second duty of care owed by a customer in this area is that of Greenwood v Martins Bank Limited (hereinafter Greenwood). This case concerned a husband who failed to notify the bank after discovering cheques forged by his wife and was precluded from denying the bank’s right to debit his account, based on an argument of estoppel.? The case simply established the second burden paced upon a customer to a bank, that if a customer has caused his bank to pay a forged cheque, knowing it is not a genuine order, then the customer will be estopped from asserting that it was a forgery. This rule, along with that established in Macmillan, is very much still in practice when determining the duties of a customer. A contemporary illustration of the application of Greenwood and Macmillan can be found in the judgment of Tai Hing and the more recent decision Patel and others v Standard Chartered Bank⁸ which demonstrate a clear affirmation of the principles established in 1918 an 1931, and more specifically a pro-customer approach taken by the courts in these cases.⁹

Should there be a wider duty of care placed on customers?

Despite recent case law, the legitimacy of these principles in modern banking have not gone unquestioned. In fact, the very submission of the bank in Tai Hing, as well as that made by other academics, is that these principles were outdated and unsuitable to common practices in today’s economic climate’, and to an extent this is valid. An examination of the Tai Hing decision reveals this

tension within the law. The case established that a bank would be personally liable for the loss incurred when a bank paid out a forged cheque. This is as a direct consequence of the English Law contained in Greenwood and Macmillan that the only duties a customer owed to his bank are to exercise reasonable care in drawing cheques and notifying the bank when forgeries had become known.’ It must be noted that in relation to Tai Hing, the customer’s forgery was a direct consequence of an employed clerk who appropriated 5.5 Hong Kong Dollars over a course of 5 years.

Interestingly, as mentioned above, Lord Finlay in Macmillan accepted that an unlocked warehouse would be deemed as ‘negligent’ on the part of the accused’². Yet in cases concerning the banker-customer relationship, the courts are unwilling to enforce, either in contract or tort, any wider obligation’s on the customer to take reasonable care in the prevention of forged cheques,” despite as mentioned earlier, their tortious appearances. Indeed, liability in tort was one of the bank’s main submissions, although its discussion is not isolated to Tai Hing, the bank reasonably sought for the courts to enforce an obligation on the customer to, at the very least, check his monthly statements to prevent negligent customers. Not unexpectedly the Privy Council refused to find liability in tort, emphasizing that in the banker-customer relationships the contract should be contained to what it is, the contract. Writing in 1986 Olgivie found flaws in this approach, arguing firstly that under the facade of `banking’ is a contract, not inherently unique from others and secondly, and in no way rudimentary, is the inter-changeable use of `tortious’ terminology used throughout these case’s, namely reciprocal `duties of care.¹⁴ This analysis is commendable, case law post-Tai Hing demonstrates the ability of contractual and tortious liabilities to work concurrently, and therefore bring the Privy Council’s decision into question. I^s Indeed an analysis of this approach would surely mean that in certain circumstances, a customer would be deemed negligent for failing to take reasonable care to prevent forged cheques, especially an imprudent customer, as in Tai Hing. The ability to bring an action in tort and contract seems to have been the case until confirmed in the House of Lords that the two actions are “separate sources of obligations.”‘ This approach, rather unfortunately for banks, will continue to

¹¹ Silvertown, A (1986) . “Fraudulent cheques – time for changes in the law? “International Banking Law 158 ‘Joint Stock Bank Ltd v MacMillan and Arthur [1918] AC 777. 25- As per Lord Finlay [1918] at 794

13 Fisher, J. (1986) “Bank and customer relations: fraud ” Journal of International Banking Law 47

¹⁴ Ogilvie, (1986) “Bank Accounts and Obligations” Canadian Business Law Journal 220

¹⁵ Henderson V Merret Sydicates [1995] 2 AC 145 — House of Lords held that the English law does not prevent concurrent claims in tort and contract

¹⁶ Robinson v P. E. Jones (Contractors) Ltd [2011] DMA Civ 9 as per LJ Jackson at PP 78

preclude courts rescuing banks from the consequences which flow when their trust in a customer is shown to have been misplaced.’

Unlike the decision of the Hong Court of Appeal in Tai Hing which recognized the economically infeasibility for banks to not only subject cheques to a rigorous inspection,” as well as the costs of what seems on the face of it, negligent customers, the Privy Council wholeheartedly disagreed. In fact, one of the justifications given by Lord Scarman when finding against the bank was the misconception that as an industry, banks are in a much better position to absorb the losses. This approach has been endorsed in later cases, namely Patel V Standard Chartered Bank Ltd’ in which the court confirmed Scarman’s justification that banks are usually in a better position to absorb loss’. This appears to find its support on a strictly policy, rather than legal, analysis of the law and has led one academic to pertinently question whether the policy considerations in relation to the financial services industry are the same in 1985 as they were in 1909.²¹ Furthermore and somewhat crucially, these cases repeatedly state that banker’s internal procedures are incapable to detect forgeries, despite what is by far in some cases, a more thorough internal system of detection. Yet the courts seem to find for the customer despite recognizing a clearly deficient management of their business, as a result, and somewhat nonsensically, the courts endorse an approach in which customers are not expected to be astute to changes in their accounts. It is therefore unsurprising that Ellinger submits that customers are in the best position to control fraud within their own organization, and highlights that in most cases organizations will carry fidelity insurance.²² Banks therefore become insurers for customers who ignorantly fail to take reasonable care of their liquid assets, Additionally, this point is emphasised when considering the mutuality of obligations between the banker and customer, specifically maintenance of records to prevent forgery. This mutuality is however, not upheld by the courts who instead place liability on the banks. Ogilvie insists that this is a form of denial from the courts of the principle of mutuality, and means banks assume a role as an insurer of companies who incur loss, in some cases, entirely by their own accord.’

¹⁷ Op. Cit. – 13

¹⁸ Op. Cit.-7

” Patel -v- Standard Chartered Bank, Commercial Court [2001] AER (D) 66

²¹ Ibid

²‘ Op. Cit. — 14

22 Ellinger, P. (1985) “Bank’s liability for paying fraudulently issued cheques” 5 Oxford Journal of Legal Studies 293

²³ Op. Cit. —14

The judgment of the Privy Council in Tai Hing has attracted vast criticism, Ogilvie goes as far as suggesting that Lord Scarman’s bias against the banks is the first issue which should be addressed as it profoundly effects his analysis of the law²⁴. Baring this in mind, it is perhaps unsurprising that the ability for banks to impose express terms in their contracts in relation to inspection of their current accounts is severely limited by a ‘rigorous test” imposed on customers to ensure that incorporated terms are sufficiently ‘clear and unambiguous’.²⁶ This is unlike the approach taken in Canadian courts which although accepts the binding effect of a ‘verification clause’ does not require such specific language to that effect.²⁷ Canadian authorities on the issue of a wider duty of care demonstrate a clear divergence on the point and demonstrate a willingness to consider the submissions of the banks in these cases. Thus, in Canada, the case law has endorsed an approach which means that even in the absence of a verification clause,’ large commercial customers do, at any rate, owe a duty to implement internal procedures that prevent forged cheques being presented for payment.’ Considering therefore that arguments for the bank have gained some judicial support in Canada, it is unsurprising that Ogilvie has described the Tai Hing decision as ‘disheartening.'” In addition, Ellinger has been highly critical of this decision, expressing doubt as to whether the clauses in Tai Hing did fall short of Scarman’s test of rigorousness, with Canadian authorities upholding clauses similar to that in Tai Hing.³¹ Moreover, statutory authority contained in Unfair Contract Terms Act 1977 imposes an additional requirement that terms be ‘reasonable’ in order to be deemed effective, enhancing an already high threshold. Despite variations in common banking practices across the jurisdictions, it is clear that the judgment in Tai Hing in unduly restrictive on the customer’s duty of care, it therefore seems plausible for Ogilvie to suggest a degree of bias in the judgment.

To conclude, it seems fair to suggest that the decision in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd is questionable, indeed so much so that in its report on Banking Services Law and Practise’ the Jack Committee accepted that there was a case for reform of the law in this area, yet despite the Law Commissions’ report these changes were not implemented. In relation to these distinct set of facts,

²⁴ Ibid

²⁵ Op. Cit. —1 – as per Lord Scarman

²⁶ Ibid

” Op. Cit. — 7

²⁸ Columbia Graphophone Co V Union Bank of Canada (1916) 34, D.L.R. 743, 38

²⁹ Canadian Pacific Hotels V Bank of Motreal (1981) 122 D.L.R. (3d) 519, 32, O.R

³⁰ Op. Cit. — 15 ³‘ Op. Cit. — 10

³² Banking Services Law and Practise — Report by Review Committee 1989, Cm 622

it does not seem unjust to argue for a wider duty of care to be placed on customers in these circumstances however, this may seem unnecessarily harsh for certain customers who are placed in a similar situation. That said it is hoped that if a court comes to address this question again, an element of responsibility should be placed on customers in relation to the maintenance of their liquid assets, especially when such a situation could be so easily avoided. However, with the decline in the use of cheques and in the advent of a technology-driven economy, financial institutions may be faced with different manifestations of customer’s duties. Furthermore, one must consider that if Ellinger writing in 1986 believed the decision did not represent modern commercial banking,” it would seem this argument is even more prominent today.

BIBLIOGRAPHY Cases

1. Canadian Pacific Hotels V Bank of Motreal (1981) 122 D.L.R, (3d) 519, 32, O.R
2. Columbia Graphophone Co V Union Bank of Canada (1916) 34, D.L.R. 743, 38
3. Greenwood v. Martins Bank Ltd. [1933] A.C. 51 .
4. Henderson V Merret Sydicates [1995] 2 AC 145
5. London Joint Stock Bank Ltd v Macmillan [1918] AC 777 (HL).
6. Robinson v P.E.Jones (Contractors) Ltd [2011] EWCA Civ 9\
7. Patel -v- Standard Chartered Bank, Commercial Court [2001] AE R (D) 66
8. Tai Hing Cotton Mill Ltd -v- Liu Chong Hing Bank Ltd [1986] AC 80 Journals:

1. Denis S (1989) “The Tai Hing Conundrum : Estoppel, Contract or Tort?. Bond Law review. Vol 1 issue (2) Article (3)
2. Ellinger, EP [1986] Lloyds Maritime and Commercial Law Quarterly 8 – cited in LS Sealy and RJA Hooley (2008) “Commercial Law, Text, Case and Materials” — Oxford University Press. Oxford. Chapter 17 Pg. 706
3. Ellinger, P. (1985) “Bank’s liability for paying fraudulently issued cheques” 5 Oxford Journal of Legal Studies 293
4. Fisher, J. (1986) “Bank and customer relations: fraud ” Journal of International Banking Law 47
5. Geva, B.(1988) “Allocation of forged cheque losses – comparative aspects, policies and a model for reform” Law Quarterly Review 250
6. Goddard, R “Banking law: the Greenwood duty revisited” – 151 New Law Journal 958
7. Ogilvie, (1986) “Bank Accounts and Obligations” Canadian Business Law Journal 220
8. Silvertown, A (1986) . “Fraudulent cheques – time for changes in the law? “International Banking Law 158
9. Teo, J. (1998) “A Stitch in time Saves Nine” Journal of International Banking Law 370

Other:

1. Banking Services Law and Practise 1989, Cm 622