Agip (Africa) Ltd. v Kingsley & Ors [1990] EWCA Civ 2 (21 December 1990)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR. JUSTICE MILLETT)

Royal Courts of Justice
21st December 1990

B e f o r e :
LORD JUSTICE FOX
LORD JUSTICE BUTLER-SLOSS
LORD JUSTICE BELDAM

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AGIP (AFRICA) LIMITED
Respondents
v.
 
BARRY KINGSLEY JACKSON EDWARD NORMAN BOWERS (both practising as Jackson & Co. a firm) IAN DUNCAN GRIFFIN
Appellants

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(Transcript of The Association of Official Shorthandwriters Ltd., Room 392, Royal Courts of Justice, and 2 New Square, Lincoln’s Inn, London, WC2A 3RU.)

____________________MR_PETER LEAVER Q.C. and MR. PETER IRVIN (instructed by Messrs. Wedlake Bell) appeared for the Appellants.
MR L J MICHAEL TUGENDHAT Q.C. and MR. M. GETTLESON (instructed by Messrs. Shindler & Co.) appeared for the Respondents.

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HTML VERSION OF JUDGMENT
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Crown Copyright ©

(Revised)
 

LORD JUSTICE FOX: This is an appeal by the defendants from a decision of Millett J.

The following account of the facts follows substantially that of Millett J. I set it out again here for convenience of reference.

The action is by Agip (Africa) Limited (“Agip”) to recover a sum of U.S.$518,822.92 of which it was fraudulently deprived by an employee. Agip seeks to follow funds telegraphically transferred by its bank in Tunisia as a result of forged instructions and to recover them not from the recipient company but from the persons who controlled that company and caused it to part with them, namely the first and third defendants. Most of the money was paid away and probably found its way to confederates of the fraudulent employee. The balance, which amounts to about U.S.$45,160 has been paid into court; the defendants make no claim to it.

Agip does not contend that the defendants were parties to the fraud and had actual knowledge of it. The claim is at common law for money had and received. In the alternative, it is contended that the defendants are bound to account in equity as constructive trustees. As against the first and second defendants, Agip relies on the mere receipt of the money. In addition, however, it is alleged that all the defendants and in particular the first and third, were guilty of wilful and reckless failure to make inquiries in order to satisfy themselves that they were not acting in furtherance of a fraud.

The Frauds

Agip was incorporated in Jersey and is a wholly owned subsidiary of Agip S.A. of Milan, an Italian oil company, which is itself a subsidiary of the Italian State holding company. Agip’s business is mainly concerned with oil exploration in Africa. In the late 1970’s and early 1980’s, it was drilling for oil in Tunisia (both on its own behalf and with other companies) under permits and concessions granted by the Tunisian Government. The Tunis branch of Agip held a U.S. dollar account at the Banque du Sud (“BdS”) in Tunis from where payments were made to overseas suppliers. Over a period of many years, both before and after 1983, when the defendants first appear in the story, Agip was systematically defrauded of millions of U.S. dollars by its chief accountant, a Mr. Zdiri. He was not a director and not an authorised signatory in respect of Agip’s bank account but it was his duty to place the completed payment orders and the invoices to which they related before the authorised signatory and get his signature to them. It was also his responsibility to take the signed orders to the bank or to entrust them to a subordinate for that purpose.

From time to time, however, Zdiri fraudulently altered the name of the payee of the orders and so diverted the payment to a recipient of his own choosing.

Between March 1983 and January 1985 alone sums of more than U.S.$10.5 million were fraudulently diverted in this way: not less than 28 payment orders were involved. The payees in the orders as altered (except Baker Oil Services Ltd. which was registered in the Isle of Man) were all companies registered in England. All were managed by the defendants from the Isle of Man. Seven different payee companies were used in succession. Each had a U.S. dollar account at the High Holborn branch of Lloyds Bank into which the money was paid.

The present action is concerned with a sum of U.S.$518 thousand odd to which I have already referred and which was paid on 8th January 1985 to Baker Oil Services Ltd. (“Baker Oil”). This was the last of the diverted payments. The frauds were discovered soon afterwards.

The Defendants

The first defendant, Mr. Jackson, and the second defendant, Mr. Bowers, practise in partnership together as chartered accountants in Douglas, Isle of Man, under the name Jackson & Co. The third defendant, Mr. Griffin, is an employee of that firm. At all material times they were acting on the instructions of their client, a Monsieur Yves Coulon, a French lawyer. He was almost certainly acting for other principals whose identity is not known.

Jackson & Co. were introduced to the High Holborn branch of Lloyds Bank in March 1983 by a Mr. Humphrey, a partner in the well known firm of Thornton Baker. They probably took over an established arrangement. Thenceforth they provided the payee companies. These companies each had a purely nominal share capital which was usually registered in the names of service companies provided by Jackson & Co. In each case Mr. Jackson and Mr. Griffin were the directors and the authorised signatories on the company’s account at Lloyds Bank. In the case of the first few companies Mr. Humphrey was also a director and authorised signatory. Any authorised signatory could sign. None of the companies had any assets or carried on any business activity. None of them was known to or had any dealings or contact with the plaintiffs. In the case of each company except Baker Oil, after two or three payments had been received and paid out, the account was closed and a new account opened for the successor company. Its predecessor was then promptly put into liquidation and Mr. Bowers was appointed liquidator. The payee companies’ bank statements all showed the receipts to be derived from payments made by Agip.

When a payment was received by the payee company it was immediately transferred, usually on the same day, to another company, Euro-Arabian Jewellery Limited (“Euro-Arabian”), which also maintained a U.S. dollar account at the same branch of Lloyds Bank. Euro-Arabian was registered in England. Mr. Jackson was one of three directors. He, Mr. Griffin and Mr. Humphrey were the authorised signatories of its account at Lloyds Bank; any one of them could sign. There is no evidence that Euro-Arabian carried on any genuine business activity. It has not been suggested that it was known to or had any dealings or contact with Agip. As soon as it received a payment from a payee company it paid it out to parties overseas.

Most of the money went to Kinz Joailler SARL (“Kinz”), a company incorporated in France and described as carrying on a jewellery business in Paris and elsewhere in France. It appears to have been a wholly owned subsidiary of Euro-Arabian. Mr. Jackson was its sole director but was probably a nominee. Monsieur Coulon was its legal adviser. It has not been suggested that it was known to Agip. Other payments were made to Monsieur Coulon and a Mr. Chouck ben Abdelaziz who has not been further identified.

Monsieur Coulon was introduced by the defendants to Mr. Breeze, the assistant manager of the High Holborn branch of Lloyds Bank. Monsieur Coulon had no authority to operate the accounts of any of the payee companies or of Euro-Arabian but Mr. Breeze was authorised to disclose information concerning the accounts to him. Mr. Breeze was told to expect payments from Tunis at the rate of approximately U.S.$500,000 a month. When a payment was expected he would be notified by Jackson & Co. and would then contact the Overseas Division of Lloyds Bank and ask to be informed when the payment was received. As soon as he learned that the money had arrived he would telephone Jackson & Co. and inform them. They would not, however, give him immediate instructions for the disbursement of the money. There would be a short interval, presumably while they sought instructions from Monsieur Coulon. Disbursement would usually be effected later on the same day on the authority of written instructions delivered by Jackson & Co. by hand to the Douglas branch of Lloyds Bank and read over the telephone to the High Holborn branch. The written instructions usually signed by Mr. Jackson would follow later by way of confirmation.

Monsieur Coulon would visit London from time to time and discuss the state of the accounts with Mr. Breeze. They would lunch together. Mr. Breeze clearly understood Monsieur Coulon to be behind the arrangements and to be the person whose instructions were being relayed to the branch by Jackson & Co. It has not been suggested that he was mistaken.

The Defendants’ state of mind

The defendants elected to call no evidence. Their state of mind is therefore largely a matter of inference. Agip relied, however, on three documents as providing some evidence of this. The first is the minutes of the first meeting of the directors of Keelward Limited, one of the payee companies, held at the offices of Jackson & Co. in Douglas on 22nd March 1984. The meeting was attended by Mr. Jackson and Mr. Griffin who were appointed directors of the company with immediate effect, and the minutes signed by Mr. Jackson. They include the following passage:

“Mr. Jackson reported that the Company has been invited to act as Agent for Euro Arabian … in the receipt of monies from Tunisia. This formed part of a long standing arrangement between the beneficial owners of Euro Arabian … the Banque du Sud in Tunis and an offshore subsidiary of Agip S.P.A. called Agip (Africa) Limited. In essence, the arrangement resulted in the extraction of monies from Tunisia in circumvention of the Tunisian Exchange Control Regulations. Keelward Limited would act merely in a fiduciary capacity and, in the absence of specific instructions to the contrary, all monies received were to be passed immediately to the account of Euro Arabian … with Lloyds Bank Plc. at 58 High Holborn, London … Euro Arabian … would ensure that Keelward Limited was paid an appropriate amount to cover fees, expenses, etc.”

The second consists of an attendance note made by Mr. Smyth, a partner in the firm of Knapp-Fishers, solicitors, of a meeting with Mr. Jackson and Monsieur Coulon on 24th July 1984 when his advice was sought in connection with the payments. Objection was taken on behalf of the defendants to its admissibility. Mr. Smyth was not called as a witness and there is no evidence that his attendance note was ever seen by any of the defendants. There was thus no admissible evidence of the truth of its contents and the judge disregarded it.

The third document consists of a letter dated 14th August 1984 and addressed by Mr. Smyth to Mr. Jackson at Jackson & Co. It is headed “Euro Arabian Jewellery” and the original was obtained from the liquidator of Euro-Arabian. It contains the considered advice which Mr. Smyth gave following his meeting with Mr. Jackson and Monsieur Coulon on 24th July. In the absence of evidence to the contrary, the judge inferred that it was seen by Mr. Jackson and is therefore admissible as evidence of the advice he received at the time. I agree with that. It deals first with the question of the recovery by the Tunisian Government or Agip from Lloyds Bank of money in the bank’s possession. In this connection it contains the following passages:

“Turning now to Agip, Agip may be able to establish a cause of action by claiming that the payments were obtained by fraud. Agip could also rely on English law as the fraud would presumably have taken place within England, at the time when the monies were transferred out of Agip’s account into the account of the U.K. company.

However, although Agip may be able to establish a cause of action, it would still be necessary for Agip to establish fraud (as defined under English law) for any action for the recovery of the monies to be successful.”

The letter then deals with the disclosure by Lloyds Bank of the banking transactions. In this connection Mr. Smyth advised:

“Because of the general principle of banking confidentiality, it would be extremely difficult for the Tunisian Government or Agip to obtain an Order requiring Lloyds Bank to disclose banking transactions, unless disclosure is ordered by the English Courts …

However, if Agip could establish a cause of action by reason of possible frauds, it might obtain an Order for the disclosure of banking transactions …

As in our case, there would appear to be no clear case of fraud under English law, this could frustrate early disclosure by Lloyds Bank, although Agip could seek an injunction whereby the monies in Lloyds Bank account would be ‘frozen’ until the matter came to full trial.”

Finally, the letter deals with tracing the money after liquidation of the payee companies. Mr. Smyth advised:

“If Agip can establish fraud, recovery of the monies after the recipient companies have been liquidated will depend, to some extent, upon whether or not Lloyds Bank held the monies on trust for Agip.”

The payment to Baker Oil

Baker Oil was incorporated on 12th October 1984 with an authorised share capital of £2,000. Mr. Jackson and Mr. Griffin each subscribed for one fl share. No other shares were issued. Mr. Jackson and Mr. Griffin were the sole directors. Jackson & Co.’s office in Douglas was the registered office. The company’s name was misleading. Neither oil nor oil services made their appearance in its Memorandum of Association.

Baker Oil was the successor to Parkfoot Limited (“Parkfoot”), which had been put into liquidation on 6th December 1984 shortly after receiving and paying out to Euro-Arabian on the same day a sum of U.S.$502,458.33. Baker Oil then opened a U.S. dollar account, number 11955608 at the High Holborn branch of Lloyds Bank. The mandate was completed on 17th December 1984 and forwarded to Mr. Breeze on the same day. Mr. Jackson and Mr. Griffin were the authorised signatories, the signature of either being sufficient.

On 18th December 1984, Mr. Del Sorbo, a senior officer of Agip’s Tunis branch and an authorised signatory of its account at the Banque du Sud, signed a payment order for U.S.$518,822.92 in favour of Maersk Supply (Tunisia) Limited (“Maersk”) at Morgan Guaranty Trust Company of New York. This was in payment of the hire of a vessel, “Maersk Endurer”, for the month of October. The invoice for that sum was dated 7th November and was due for payment within 60 days. After Mr. Del Sorbo had signed the payment order, it was fraudulently and without his knowledge altered by the substitution for the name of the original payee of the name “Beker-Oil Service Cie” (sic) with the address of High Holborn branch of Lloyds Bank and the correct number of Baker Oil’s dollar account.

The altered payment order was taken to the Banque du Sud on or shortly before Friday 4th January 1985. On that day BdS executed it by debiting Agip’s account with the sum of U.S.$518,822.92, value date 7th January, and by telexing instructions to Lloyds Bank as follows:

“Attention Freeman

Order Agip

Payer fil sans frais pour nous dol. U.S. 518,822.92

Beker Oil Services Cie cpte no. 11.95.56.08 aupres vous

memes.

Val 7/1.

Reglement V/Fact 40 Meu – 07/84 du 7/11/84 …

Vous couvrons aupres Citibank New York meme valeur Bank Sud.”

Miss Freeman was the principal in charge of foreign services at the High Holborn branch. The branch had no telex and the message was received by Lloyds Overseas Division where it was the responsibility of a Mr. Bendon, an International Manager, to assess the delivery risk. When BdS telexed its instructions to Lloyds Bank, it also telexed appropriate instructions to Citibank, its correspondent bank in New York, to debit its account at Citibank and to credit Lloyds Bank or its correspondent bank in New York with a similar amount. This necessarily involved the exposure of Lloyds Bank to a delivery risk in New York. New York is five hours behind London, and Lloyds Bank was being asked to make a payment in London on 7th January 1985 before the opening of business in New York and well before confirmation of the receipt of cover.

The High Holborn branch had already been notified by Jackson & Co. on Friday 4th January that another payment was expected and had asked to be informed by Lloyds Overseas as soon as it was received. Miss Freeman heard from Lloyds Overseas on the Monday morning, 7th January, that the money had been received for the account of Baker Oil and she so informed Mr. Breeze. He rang Mr. Griffin at about 1.00 pm and conveyed the information to him. Half an hour or so later Monsieur Coulon telephoned from the airport and spoke to Mr. Breeze. He said that he was on his way to the bank. Mr. Breeze told him that the money had arrived.

The attempted recall

The fraud was discovered in Tunis late in the afternoon of Friday 4th January but its extent did not become apparent until the morning of Monday 7th January when Mr. Del Sorbo visited the BdS and was shown a large number of forged payment orders. These included the order for U.S.$502,458.33 in favour of Parkfoot and the order for U.S.$518,822.92 in favour of Baker Oil. He confirmed that neither company was known to Agip and that the name of the payee on the original payment order had been altered after he had signed it. He asked the bank to try to stop the two payments.

The BdS sent two messages by telex to Lloyds Bank during the afternoon of 7th January, one in respect of the payment to Parkfoot and one in respect of the payment to Baker Oil. In each case the BdS stated that according to the party giving the order the transfer had been “effectue par erreur”. No other explanation was given. Lloyds Bank was asked to stop the payment or, if this was not possible, to obtain its customer’s agreement to reverse the transaction. Parkfoot had already paid the money away and closed its account at Lloyds Bank. It was far too late for Lloyds Bank to do anything about it and there is no evidence that it made any attempt to do so.

The telex in respect of the payment to Baker Oil was received by Lloyds Overseas Division at 2.25 pm London time. Mr. Bendon was advised of it and spoke to the Banque du Sud. He also spoke to Miss Freeman at the High Holborn branch. He learned from her that the money had been credited to Baker Oil’s account, that the customer had already been advised of the fact and that Miss Freeman held instructions to pay the money out the same day. At Mr. Bendon’s request Miss Freeman spoke to Jackson & Co. She can no longer remember to whom she spoke but she reported that Lloyds Bank had received a request from the BdS for a recall. She was asked for the reason and said that no reason had been given. She was promised that the money would be left with Lloyds Bank for 24 hours or possibly just overnight “so that checks could be made”. She reported this to Mr. Bendon.

Mr. Bendon spoke again to the BdS and dictated a reply to the bank’s two telexes that same afternoon. It was sent by cable on 9th January and confirmed by telex on 10th January. So far as material it reads:

“… I have to confirm that we had already paid the amount of US dollars 518,822.92 on the morning of 7/1/1985 to our customers Baker Oil … account number 11955608 with our High Holborn branch in accordance with the instructions which you had given us on 4th January with value 7th January. Our branch have contacted their customer who refuse to refund stating that they know of no reason why they should not have received monies which they believe to be due to them and which they have stated to us they have already disposed of to other parties. I regret therefore that we are unable to stop payment as you have requested.”

The judge said there were significant differences between Mr. Bendon’s message, which was calculated to deter the BdS from pursuing its attempt to recall the money, and Miss Freeman’s evidence of what she was told by Jackson & Co. and reported to Mr. Bendon. It is possible that there was some misunderstanding between them but the judge doubted it and, in the absence of any evidence from the defendants, he was not prepared to infer one. Miss Freeman, he said, was a clear and reliable witness but after this lapse of time, he said, she could not be expected to remember everything she had heard and reported to Mr. Bendon.

In the witness box Mr. Bendon, the judge found, was confused about the relationship between the two payments whose recall had been sought but there is no reason to think that he was confused about it at the time, and the message he dictated speaks for itself. His failure to mention Jackson & Co.’s offer to keep the money in Lloyds Bank for a short period appears extraordinary but it was, in the judge’s view, to be explained by the fact that from first to last he was concerned not for the BdS, still less for its customer, but for the position of Lloyds Bank. In the absence of evidence from the defendants to the contrary the judge concluded:

1. That Jackson & Co. did not offer to refund the money if a good reason was given for the recall but rather that they refused to return the money unless a good reason was given, so that Mr. Bendon’s statement that they refused to refund was accurate so far as it went.

2. That Mr. Bendon (rightly or wrongly) took that to mean a good reason for Lloyds

3. That accordingly he took the offer to keep the money at Lloyds Bank for a short while to be a matter between Lloyds Bank and its customer and not something to be communicated to the BdS.

4. That Mr. Bendon’s statement that “they knew of no reason why they should not have received monies which they believe to be due to them” was based on something to that effect said by Jackson & Co. to Miss Freeman in order to justify their refusal to refund the money unless there was a good reason to do so; but

5. Mr. Bendon’s statement that “they have stated to us that they have already disposed of it to other parties” was probably based not on anything said by Jackson & Co. to Miss Freeman but on his own appreciation as banker of the consequences of Miss Freeman having in her possession instructions from the customer for the disposal of the money.

The disposal of the money

On the following day, 8th January, Miss Freeman spoke to Mr. Bendon again. Following their discussion she telephoned Jackson & Co. and confirmed that so far as Lloyds Bank was concerned the value was good and the money was at the customer’s disposal, no reason for recall having been given. Miss Freeman then dealt with the money in accordance with the instructions which she had received by telephone on the previous day and which were confirmed by letter dated 7th January and signed by Mr. Griffin. In accordance with those instructions, she transferred the U.S.$518,822.92, which was the only sum standing to the credit of Baker Oil’s account, to an account in the same branch in the name of Jackson & Co. and closed the account. She then confirmed these transactions by letter addressed to the secretary of Baker Oil, a service company provided by Jackson & Co. of which the defendants were directors and shareholders, in which she referred to the receipt of the U.S.$518,822.92 “by order of Agip”.

Jackson & Co.’s account was an ordinary partnership account. It had been opened in March 1984. All three defendants were authorised signatories. Any one of them could sign. Immediately before the transfer from Baker Oil, the account was U.S.$7,911.80 in credit. As a result of the transfer it became U.S.$526,734.72 in credit. On 9th January, in accordance with instructions contained in or confirmed by a letter dated 8th January and signed by Mr. Griffin, U.S.$518,000 was transferred from the account to Jackson & Co.’s clients’ account at the Isle of Man Bank Limited in the Isle of Man which was newly opened for this purpose. After two other small debits, this left the account of Jackson & Co. at Lloyds Bank U.S.$8,560.80 in credit. Although the account was an ordinary partnership account it was being used as a clients’ account, for Jackson & Co. did not receive the money for their own benefit but as nominees for their clients.

On 15th January the greater part of the U.S.$518,000 was paid out by the Isle of Man bank in accordance with a letter of instructions of the previous day by Jackson & Co. The money was paid as follows:

U.S.$ 400,000 to Kinz

U.S.$70,000 to Mr. Chouck ben Abdelaziz

U.S.$ equivalent of FFfr. 34,330 to M. Coulon.

In a subsequent letter dated 22nd February 1985 to Agip’s solicitors, the defendants’ solicitors stated, inter alia:

“If your clients can persuade ours that the funds in question have been stolen or otherwise improperly misappropriated our clients will co-operate immediately and disclose all material facts within their knowledge and do all in their power to preserve any such assets

– judge’s underlining.

Agip relied on the words underlined as evidence that the funds were not really paid away on 15th January but remained available to the defendants. When last seen, it was pointed out, the bulk of the money was in the hands of a wholly owned subsidiary of Euro-Arabian, both companies being under Jackson & Co.’s control.

The judge did not think that that was a fair reading of the evidence. The meaning of the words underlined in the passage above was, he thought, far too uncertain to bear the weight placed upon them. In their context and immediately following a reference to “material facts within their knowledge”, the judge thought the words “such assets” probably meant assets within their control. They still had over U.S.$45,000 within their control which they subsequently paid into court. Moreover, there was evidence that Jackson & Co. were unwilling to pay out the money as soon as they did but yielded to the importunity of their clients. The judge held that there was no ground upon which he could legitimately infer that the defendants retained control of the money and there was good reason to suppose that whatever was paid to their clients has gone for ever.

Subsequent events

Euro-Arabian and Kinz have been put into liquidation. The plaintiffs have an unsatisfied judgment against Baker Oil for the return of the money. They have brought proceedings in Tunisia against the BdS for the recovery of the sums debited to their account on forged instructions but these have been unsuccessful. Now they seek to recover the U.S.$518,822.92 from the defendants.

The right to sue

Agip’s claim is for money paid under a mistake of fact.

The defendants’ contention is that Agip has disclosed no title to sue. The basis of that contention is that the relationship between banker and customers is one of debtor and creditor. When the customer pays money into the bank, the ownership of the money passes to the bank. The bank can do what it likes with it. What the bank undertakes to do is to credit the amount of the money to the customer’s account, and to honour his drafts or other proper directions in relation to it.

Thus, it is said, when BdS paid Baker Oil it had no authority to do so on behalf of Agip (because the order for payment was forged). Further, BdS paid with its own money.

In terms of the mechanism of payment what happened was no different from what would have happened if the order was not forged but genuine. BdS paid the collecting bank and debited Agip’s account at BdS. In practical terms BdS pays with Agip’s money in both cases and, indeed, in both cases intended to do so. In both cases the substance of the matter is that money standing to the credit of Agip’s account is paid to a third party in accordance with the order or supposed order, as the case may be, of Agip. The direction is to pay from Agip’s account. To say that the payment is made out of BdS’s own funds, while true as far as it goes, only tells half the story. The banker’s instruction is to pay from the customer’s account. He does so by a payment from his own funds and a corresponding debit. The reality is a payment by the customer at any rate in a case where the customer has no right to require a re-crediting of his account. Nothing passes in specie. The whole matter is dealt with by accounting transactions partly in the paying bank and partly in the clearing process.

It does not advance the matter to say that BdS had no mandate from Agip to make the payment at Agip’s expense. What actually happened was that BdS did so. Moreover, when Agip sued BdS in the Tunisian courts (and I take it that Tunisian law was the proper law of the banking relationship between Agip and BdS) to have its account re-credited, it failed to obtain that relief. In those circumstances, to regard Agip as not having paid Baker Oil is highly unreal. BdS had no intention of paying with its own money. The substance of its intention (which it achieved) was to pay with Agip’s money. The order, after all, was an order to pay with Agip’s money.

I agree, therefore, with the view of Millett J. that “the fact is that BdS paid Baker Oil with the Plaintiff’s money and not its own”. If BdS paid away Agip’s money, Agip itself must be entitled to pursue such remedies as there may be for its recovery. The money was certainly paid under a mistake of fact.

It is said that the difference between this case and a case where the bank pays with the authority (though given under a mistake of fact) of the customer, is that, in the latter case, the bank pays as agent of the customer and that, accordingly, either the principal or agent can sue.

Thus it is contended that where, as here, there is a claim to recover money paid by mistake of fact, the mistake must be that of the plaintiff or of his agent. That, it is contended, cannot be established here. There was no mistake by Agip which was simply the victim of a fraud. The only mistake was that of BdS which paid in the mistaken belief that it had Agip’s authority to do so. BdS, it is said, did not pay as the agent of Agip because it had no authority to pay.

“It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer’s cheques as against money of the customer’s in the banker’s hands the relation is that of principal and agent. The cheque is an order of the principal’s addressed to the agent to pay out of the principal’s money in the agent’s hands the amount of the cheque to the payee thereof.”

The defendants, as I understand it, would accept the proposition as to agency but say that BdS did not pay as agent of Agip because of lack of authority. The order was forged. It seems to me, however, BdS plainly intended to pay as agent of Agip. Thus, it paid in accordance with the order as presented to it and debited Agip’s account accordingly. There was no reason why it should do anything else. The order as presented to it appeared perfectly regular.

But, accepting the intention, can BdS properly be regarded as having paid as agents for Agip? The defendants say the absence of authority concludes the point against Agip. The judge met that by saying that BdS had general authority from Agip to debit the account in accordance with instructions. That is correct but it is said that there were no instructions because the order was bad. I do not feel able to accept that. The order emanated from within Agip; it was properly signed and the amount had not been altered. BdS had no reason at all to doubt its authenticity. The Tunisian court refused to order BdS to re-credit Agip’s account. For practical purposes, therefore, the order was given effect to according to its tenor as if it were a proper order. Everything that was done (i.e. the payments and the debit) stands good so far as the banking transaction is concerned. Agip cannot recover from BdS. And BdS does not seek to recover from Baker Oil. It seems to me, therefore, that the order must be regarded as having been paid by BdS as agent for Agip. That, however, does not alter the circumstances that it was money paid under a mistake of fact. The defendants accept that a principal can recover where there is either: (i) mistaken payment by an authorised agent within his instructions or (ii) mistaken payment in breach of instructions by using money entrusted to the agent by the principal. The present case can be brought within at any rate the first of these.

The judge referred to the decision in Colonial Bank vExchange Bank of Yarmouth [1886] 11 A.C. 84, 91. In that case it was held that the bank had a sufficient interest to recover the money, if only to obtain relief from the consequences of its liability to its customer. He thought the decision was inconsistent with any suggestion that, far from being the wrong plaintiff, the bank was the only plaintiff. The present point, however, was not before the Privy Council in that case and I think the decision gives only limited assistance.

Looking at the whole matter, however, it seems to me that the judge correctly concluded that Agip’s right to sue was made out.

Tracing at Common Law

The judge held that Agip was not entitled to trace at law. Tracing at law does not depend upon the establishment of an initial fiduciary relationship. Liability depends upon receipt by the defendant of the plaintiff’s money and the extent of the liability depends on the amount received. Since liability depends upon receipt the fact that a recipient has not retained the asset is irrelevant. For the same reason dishonesty or lack of inquiry on the part of the recipient are irrelevant. Identification in the defendant’s hands of the plaintiff’s asset is, however, necessary. It must be shown that the money received by the defendant was the money of the plaintiff. Further, the very limited common law remedies make it difficult to follow at law into mixed funds. The judge’s view of the present case was that the common law remedy was not available:

“The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. It remained throughout in the possession of the Banque du Sud. No copy was sent to Lloyds Bank or Baker Oil or presented to the Banque du Sud in exchange for the money. It was normally the Plaintiffs’ practice to forward a copy of the payment order to the supplier when paying an invoice but this was for information only. It did not authorise or enable the supplier to obtain payment. There is no evidence that this practice was followed in the case of forged payment orders and it is exceedingly unlikely that it was.

Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money.”

Agip relies upon the decision of the Court of Appeal in Banque Beige v. Hambrouck [1921] 1 K.B. 321. In that case what happened was that Hambrouck was a cashier employed by Pelabon. By fraud he possessed himself of cheques purporting to be drawn by Pelabon but in fact without Pelabon’s authority. The cheques (which purported to be drawn to the order of Hambrouck himself or to his order) were crossed so payment had to be made through a bank. Hambrouck, therefore, opened an account with Farrow’s Bank at Richmond. He endorsed the cheques and paid them into that account. Farrow’s Bank cleared them through the London and South Western Bank which collected the amount of the cheques and placed them to the credit of Hambrouck’s account. It seems that no funds were paid into that account other than the amount of the forged cheques (see per Atkin L.J. at p. 331).

Hambrouck was living with Mademoiselle Spanoghe to whom he paid various sums of money out of his bank account with Farrow’s. Mademoiselle Spanoghe paid them into a deposit account of her own in the London Joint City and Midland Bank. No other sums were at any time placed in that deposit account. Certain sums were drawn out for Hambrouck’s defence. The balance, £315, was the subject of the action. The Court of Appeal held that Banque Beige was entitled to recover it. Bankes L.J. at p. 328 and Atkin L.J. at p. 334 saw no objection to a claim at common law.

At p. 335, after having referred to Lord Ellenborough’s judgment in Taylor v. Plumer 3 M. & S. 562, Atkin L.J. said this:

” notice that in Sinclair v. Brougham (2) Lord Haldane L.C. in dealing with this decision says: ‘Lord Ellenborough laid down, as a limit to this proposition, that if the money had become incapable of being traced, as, for instance, when it had been paid into the broker’s general account with his banker, the principal had no remedy excepting to prove as a creditor for money had and received,’ and proceeds to say ‘you can, even at law, follow, but only so long as the relation of debtor and creditor has not superseded the right in rem.’ The words above ‘as for instance’ et seq. do not represent and doubtless do not purport to represent Lord Ellenborough’s actual words; and I venture to doubt whether the common law ever so restricted the right as to hold that the money became incapable of being traced, merely because paid into the broker’s general account with his banker. The question always was, Had the means of ascertainment failed? But if in 1815 the common law halted outside the bankers’ door, by 1879 equity had had the courage to lift the latch, walk in and examine the books: In re Hallett’s Estate. (3) I see no reason why the means of ascertainment so provided should not now be available both for common law and equity proceedings. If, following the principles laid down in In re Hallett’s Estate (3), it can be ascertained either that the money in the bank, or the commodity which it has bought, is ‘the product of, or substitute for, the original thing,’ then it still follows ‘the nature of the thing itself.’ On these principles it would follow that as the money paid into the bank can be identified as the product of the original money, the plaintiffs have the common law right to claim it, and can sue for money had and received. In the present case less difficulty than usual is experienced in tracing the descent of the money, for subsantially no other money has ever been mixed with the proceeds of the fraud.”

Bankes L.J. at p. 328, while accepting that tracing at common law was permissible, took a narrower position. He said that there was no difficulty about tracing at law because the money which the Bank sought to remove was capable of being traced because the appellant (Spanoghe) never paid any money into the Bank except money which was part of the proceeds of Hambrouck’s fraud and all the money standing to the credit of the account was now in court.

Scrutton L.J. at p. 330 thought that tracing at common law was probably not permissible because the money had changed its identity when paid into the account at Farrow’s. He felt, however, that the Banque Beige could trace in equity and that its claim succeeded.

Now in the present case the course of events was as follows:

(1) The original payment order was in December signed by an authorised signatory.

(2) The name of the payee was then altered to Baker Oil.

(3) The altered order was then taken to BdS who complied with it by debiting the account of Agip with U.S.$518,822.92 and then instructing Lloyds Bank to pay Baker Oil. BdS also instructed Citibank in New York to debit its account with Citibank and credit Lloyds with the amount of the order.

(4) Lloyds credited the money to Baker Oil’s account on the morning of 7th January.

(5) On 8th January, Lloyds in pursuance of instructions from Baker Oil transferred the U.S.$518,822.92 which was the only sum standing to the credit of Baker Oil’s account to an account in the name of Jackson & Co.

(6) Immediately before the transfer from Baker Oil, Jackson & Co.’s account was U.S.$7,911.80 in credit. In consequence of the transfer it became U.S.$526,734.72 in credit.

The inquiry which has to be made is whether the money paid to Jackson & Co.’s account “was the product of or substitute for the original thing”. In answering that question I do not think that it matters that the order was not a cheque. It was a direction by the account holder to the bank.

When Atkin L.J. refers in Banque Beige v. Hambrouck to the “original money” he is, I assume, referring to the money credited by Banque Beige (the plaintiff) to Hambrouck’s account. Money from that account was the only money in Mademoiselle Spanoghe’s deposit account. It was not, therefore, difficult to say that the money in issue (i.e. the residue of the Spanoghe account) could be identified as the product of the original money. There were no complexities of tracing at all. Everything in Spanoghe’s account came from Hambrouck’s account and everything in Hambrouck’s account came from the credit in respect of the fraudulent cheque.

The position in the present case is much more difficult. BdS can be regarded as having paid with Agip’s money but Lloyds (acting as directed by BdS) paid Baker Oil with its own money. It had no other (and accordingly took a delivery risk). It was, in the end, put in funds, but it is difficult to see how the origin of those funds can be identified without tracing the money through the New York clearing system.

The money in the present case did get mixed on two occasions. The first was in the New York clearing system and the second was in Jackson & Co.’s own account. The judge held that the latter was of no consequence. I agree. The common law remedy attached to the recipient and its subsequent transposition does not alter his liability. The problem arises at an earlier stage. What did Jackson & Co. receive which was the product of Agip’s asset?

Baker Oil was controlled for present purposes by Jackson & Co. but Baker Oil was paid by Lloyds which had not been put in funds from New York. It was subsequently recouped. But it is not possible to show the source from which it was recouped without tracing the money through the New York clearing system.

24

The judge said:

“Unless Lloyds Bank’s correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of Citibank and Lloyds Bank’s correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud.”

I respectfully agree with that view. Accordingly, it seems to me that the common law remedy is not available.

I should add this. Atkin L.J.’s approach in the Banque Beige case amounts virtually to saying that there is now no difference between the common law and equitable remedies. Indeed, the common law remedy might be wider because of the absence of any requirement of a fiduciary relationship. There may be a good deal to be said for that view but it goes well beyond any other case and well beyond the views of Bankes and Scrutton L.JJ. And in the 70 years since the Banque Beige decision it has not been applied. Whether, short of the House of Lords, it is now open to the courts to adopt it I need not consider. I would in any event feel difficulty in doing so in the present case where, as I indicate later, it seems to me that the established equitable rules provide an adequate remedy.

Tracing in Equity

Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is, however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being. There is no difficulty about that in the present case since Zdiri must have been in a fiduciary relationship with Agip. He was the Chief Accountant of Agip and was entrusted with the signed drafts or orders upon BdS.

I come then to the circumstances in which strangers to the trust relationship (the defendants) may be made liable in equity. They are, broadly, as follows;

(1) Knowing receipt of or dealing with the trust property. The judge held that Mr. Griffin (the third defendant) did not receive the money at all and that Mr. Jackson and Mr. Bowers (the first and second defendants) did not receive or apply it for their benefit. Accordingly, he held that none of them could be held liable as constructive trustees on the basis of knowing receipt of the money. There is no cross-appeal as to that.

(2) Knowing assistance. A person may be liable, even though he does not himself receive the trust property, if he knowingly assists in a fraudulent design on the part of a trustee (including a constructive trustee). Liability under this head is not related to the receipt of trust property by the person sought to be made liable (Barnes vAddy [1874] 9 Ch.App. 244).

The degree of knowledge required was described by Ungoed-Thomas J. in Selangor United Rubber Estates Ltd. vCradock (No. 3) [1968] 1 W.L.R. 1555 at p. 1590 as circumstances which would indicate to an honest and reasonable man that such a design was being committed or would put him on inquiry whether it was being committed.

Peter Gibson J. in Baden, Delvaux and Lecuit and others vSociete General pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1983] B.C.L.C. 325 at p. 407 gave a more expanded description of the circumstances constituting the necessary knowledge under five heads as follows:

(i) actual knowledge;

(ii) wilfully shutting one’s eyes to the obvious;

(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(iv) knowledge of any circumstances which would indicate the facts to an honest and reasonable man;

(v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

I accept that formulation. It is, however, only an explanation of the general principle and is not necessarily comprehensive.

The judge held, and it is not challenged, that Mr. Bowers did not participate in the furtherance of the fraud at all; although he was a partner in Jackson & Co. he played no part in the movement of the money and gave no instructions about it.

Mr. Jackson and Mr. Griffin are in quite a different position. Mr. Jackson set up the company structures. Mr. Jackson and Mr. Griffin controlled the movement of the money from the time it reached Baker Oil to the time it was paid out of the account of Jackson & Co. in the Isle of Man bank.

On the evidence (and in the absence of evidence from Mr. Jackson and Mr. Griffin themselves) I agree with the judge that both of them must be regarded as having assisted in the fraud. That, however, by no means concludes the matter. There remains the question of their state of mind. Did they have the necessary degree of knowledge?

The first inquiry is what did they know. As to that:

(1) They knew that a very large amount of money was involved. It was U.S.$10 million in under two years. It had all come along the same track.

(2) They knew the origin of the money and its destination. Its origin was Agip and the destination of most of it was Kinz.

(3) Agip was an oil company with operations in Tunisia. Kinz were jewellers in France.

(4) There is nothing to suggest that there was any commercial reason why Agip should be paying such sums to Kinz.

(5) As the judge said, they must have realised that the only function of the payee companies or of Euro-Arabian was to act as “cut-outs” in order to conceal the true destination of the monies from Agip. And the purpose of having two cut-outs instead of one was to bar any connection between Agip and Kinz without reference to the records of Lloyds Bank.

There is also some material documentary evidence. First, there is the letter of 14th August 1984 from Mr. Smyth of Knapp Fisher to Mr. Jackson. That contains advice directed to the possibility that:

“… Agip may be able to establish a cause of action by establishing that the payments were obtained by fraud.”

The letter further contains the statement:

“Because of the general principle of banking confidentiality, it would be extremely difficult for the Tunisian Government or Agip to obtain an order requiring Lloyds Bank to disclose banking transactions …”

This shows that the question of fraud was being considered and some anxiety being felt at the possibility that Agip might obtain access to bank records. The significance of bank records is that they are or may be a signpost to the ultimate destination of the money.

Why was concern being felt about what AGIP might discover?

If there were doubts about fraud they could be set at rest by getting in touch with AGIP and disclosing what was known.

It is, of course, possible that Mr. Jackson and Mr. Griffih were honest men and that there are facts which we do not know which would demonstrate that. But, if so, they could have attended the trial and explained their position in the witness box. They did not do so. One can only infer that they were not prepared to submit their activities to critical examination.

In the circumstances I think that the judge rightly came to the conclusion that they must have known they were laundering money, and were consequently helping their clients to make arrangements to conceal some dispositions of money which had such a degree of impropriety that neither they nor their clients could afford to have them disclosed.

Certain excuses, justifications and exculpatory facts are put forward. Thus, it is said that Mr. Jackson and Mr. Griffin had no cause for suspicion because Jackson & Co. took over arrangements already previously in existence and were introduced to the matter by a partner in the very well known accountants, Messrs. Thornton Baker. I do not find that is of any assistance to the defendants. The respectability of the person making the introduction did not relieve Mr. Jackson from obligation to make proper inquiries as to suspicious circumstances coming to his notice then or subsequently. We do not, in fact, know what information was made available to Mr. Jackson upon his introduction to the matter. But by August 1984, Jackson & Co. cannot have supposed that the matter was clearly free from impropriety. Knapp Fisher were tendering advice to them about the possibility of fraud. The genesis of the advice of August 1984 requires explanation from Mr. Jackson personally and the court has received none. In my opinion, well before the circumstances giving rise to the present case, Mr. Jackson and Mr. Griffin were put on inquiry. Either they did not inquire at all or, if they did, and the inquiry disclosed innocent activities, they have not disclosed to the court what they learnt.

Next, there is the circumstance referred to in the minutes of the Keelward Limited meeting of 22nd March 1984, that the aim was “the circumvention” of the Tunisian Exchange Control Regulations. That minute offers no reassurance in the search for honest decisions. Not only are those in control of Keelward j Limited invited to assist in a transaction which is itself an evasion of the exchange control laws of Tunisia but it is very evident that the money is “hot” and it will be got rid of immediately to the next in line. I do not think that persons who need to demonstrate that they have acted honestly can shelter behind transactions or objects which were themselves disreputable. We do not even know whether they say they believed the exchange control story. It is not easy to see why they should have believed it. Why should a subsidiary of the Italian state oil corporation and which was drilling or prospecting for oil in Tunisia (under licence from the Tunisian authorities) wish to take the risk of engaging in schemes to avoid the local exchange control? Jackson & Co. could have informed themselves about Agip’s status without difficulty if they did not know it anyway.

The question is whether Mr. Jackson and Mr. Griffin acted honestly. The contents of the minute are not support for the view that they did. They knew that something was concealed. The fact that the concealing was labelled as a “circumvention” does not alter that; it suggests some sort of impropriety. It would be an evasion of the local law on a matter of importance to the Tunisian State. If the known facts indicate a lack of frankness, the person assisting in effecting the transaction in question must take the risk in the absence of further explanation that it is fraudulent.

Our attention is drawn to the reaction of Mr. Jackson and Mr. Griffin to the question of a recall of the funds on 7th January 1985. Agip’s evidence was as follows:

Miss Freeman:

‘I believe I informed them [the customer] that we had received a request from the Banque du Sud for a recall of the payment. I believe the customer would have asked why the payment was being recalled. We had no reason for that. The customer said that they were unaware of the payment -the reasons for the recall, and I believe they offered to leave the fund with us for 24 hours so that checks could be made.’

Mr. Breeze:

‘We were instructed that the monies should be – despite the written instruction which had already been given, that we should hold the money overnight before any transfer was made … I understood that it was for us to ensure that there were no legal obligations for the return of the money.'”

It is said that the offer to leave the money with Lloyds for 24 hours was inconsistent with any dishonesty. It may be that, if Mr. Jackson and Mr. Griffin had given evidence so that the judge had an opportunity of forming a view as to their character, veracity and intentions, the offer to keep the money for 24 hours might have been a circumstance which would have had some weight in reaching his overall conclusion regarding the honesty of their personal attitudes. Without such evidence, it seems to me to tell us very little. They may have felt that they had no alternative but to make the offer. The judge, I should add, found that Jackson & Co. did not offer to return the money if a good reason was given for the recall but rather that they refused to return it unless a good reason was given.

In the end, it seems to me that the most striking feature in the case is that in August 1984 Mr. Jackson and Mr. Griffin were being given advice on the possibility that a payment or payments might involve a fraud on Agip. Having got to that point it seems to me that persons acting honestly would have pursued the matter with a view to satisfying themselves that there was no fraud. But there is nothing to show that they did that. They made no inquiries of Agip at all. They let matters continue. In the circumstances, I conclude that Mr. Jackson and Mr. Griffin are liable as constructive trustees. Mr. Bowers is liable for the acts of Mr. Jackson, who was his partner, and of Mr. Griffin, who was employed by the partnership.

Accordingly, I think that the judge came to the right conclusion and I would dismiss the appeal.

LORD JUSTICE BUTLER-SLOSS: I agree.

LORD JUSTICE BELDAM: I agree.

Order: Appeal dismissed with costs. Leave to appeal to the House of Lords refused.

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