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Banco de Portugal v. Waterlow and Sons Ltd

[1932] A.C. 452

(Judgment by: Viscount Sankey LC (including background))

Between: Banco de Portugal - Appellant
And: Waterlow and Sons Ltd - Respondent

House of Lords

Viscount Sankey LC

Lord Warrington of Clyffe

Lord Atkin

Lord Russell of Killowen

Lord MacMillan

Subject references:
Measure of Damages Contract to print Bank Notes
Bank of Issue
Delivery to unauthorized Person
Spurious Notes put into Circulation
Withdrawal of Issue and Exchange of Notes of that issue, good or bad, for other Notes of Bank
Loss on Exchange of Notes of an inconvertible Currency

Judgment date: 28 April 1932

Judgment by:
Viscount Sankey LC (including background)

A firm of printers employed by the Bank of Portugal to print a series of bank notes known as Vasco da Gama 500 escudo notes delivered to the Bank 600,000 notes which were put into circulation in Portugal. Subsequently, in breach of their contract of employment, the printers delivered to one M., the head of a band of criminals, 580,000 notes of the same type, printed from the original plates or from plates made from the same die, in the belief that he had the authority of the Bank. M. and his associates introduced these false notes into Portugal and put a large number of them into circulation. The Bank on discovering that unauthorized notes were in circulation issued notices withdrawing the whole of this issue of Vasco da Gama notes and undertaking, within a limited time, to exchange all notes of this type presented to the Bank for other notes. The Bank had an exclusive licence to issue bank notes as legal tender in Portugal, but the amount of the notes to be issued was controlled by law. At all material times the currency was inconvertible.

In an action by the Bank against the printers for breach of contract the defendants maintained

 that the loss suffered by the Bank was due to their own voluntary action in paying the unauthorized notes;
 that the loss to the Bank was limited to the cost of printing and paper in regard to the new issue:-


 that the loss arose naturally from the breach of contract;
 by Viscount Sankey L.C., Lord Atkin, and Lord Macmillan (Lord Warrington of Clyffe and Lord Russell of Killowen dissenting), that the proper measure of damages was the exchange value expressed in sterling of the genuine currency given in exchange for the spurious notes together with the cost of printing the genuine notes withdrawn.

Both these appeals related to the measure of damages. The facts are fully stated in the opinion of the Lord Chancellor. The following statement is merely to explain the nature of the judgments.

In the action the Banco de Portugal, of 148 Rua de Commercio, Lisbon, bankers to the Portuguese Government, claimed damages for alleged breach of contract, negligence, or conversion from Waterlow & Sons, Ld., printers, of Great Winchester Street, E.C.

The Banco de Portugal said that in 1922 they entered into certain contracts with Messrs. Waterlow & Sons for the printing and supply of Portuguese bank notes. They alleged that one of the terms of those contracts was that Messrs. Waterlow & Sons should take all necessary precautions to prevent forgery of the notes and that they should not print notes from the same plates except on the express authority of the Bank and for delivery to the Bank. The Bank alleged that, in breach of the contract, or negligently and in breach of duty, Messrs. Waterlow & Sons in 1925 printed a quantity of 500 escudos [about 5l.] bank notes of the issue bearing a portrait of Vasco da Gama, the circumnavigator, from the plates made to the Bank's specification and delivered them to an unauthorized person, a Dutchman named Marang, whose associates formed the Banco de Angola e Metropole in Portugal to enable the notes to be put into circulation. The Bank alleged that they were forced to withdraw the issue from circulation and to honour all notes which were presented, thus suffering considerable loss.

Messrs. Waterlow & Sons denied that they had been guilty of any breach of contract, breach of duty, or negligence. They further said that, if the Bank had suffered any damage, that damage was caused, or contributed to, by the Bank's own negligence.

Wright J. held that it was an implied term of the contract that there was to be no use of the plates for any purpose not authorized by the plaintiffs, and that there was an absolute duty on the defendants not to print or deliver notes of the plaintiff Bank without the authority of the Bank, and, even if the defendants were bound only to take reasonable care to avoid such acts, the defendants had, on the facts, fallen short of the standard of care required by the special nature of the business, and the plaintiffs were entitled to recover. His Lordship entered judgment for 569,421l., with costs, in favour of the Banco de Portugal.

Messrs. Waterlow & Sons appealed on the ground that the damages were excessive, and the Bank cross-appealed in respect of a deduction of 80,000l. which Wright J. had made from the amount of damages claimed by them in respect of spurious notes cashed by the Bank after they had the means of discriminating the true from the false.

Greer and Slesser L.JJ. held that the damages should be reduced to 300,000l., on the ground that, if the Bank had acted reasonably, they would have obtained from Messrs. Waterlow means of distinguishing good notes from bad within five days of the discovery of the fraud. The Bank, however, were entitled to those damages based on the exchange value of good notes which they had issued in place of bad.

Scrutton L.J. thought that the Bank were not entitled to damages on the basis of the face value of the genuine notes issued by them in exchange for Marang notes, but only to 8922l., the cost of printing notes to replace the genuine notes with which they had parted. If, on the other hand, he was wrong in this, he thought that the Bank were entitled to the full amount of their claim.

On the present appeals Messrs. Waterlow maintained that the only loss suffered by the Bank was the loss of printing and paper. The Bank maintained that judgment ought to be entered for them for 610,392l. or, alternatively, for 569,421l., the amount awarded by Wright J.

By arrangement between the parties Messrs. Waterlow's appeal was heard first.

1932. Feb. 2, 4, 5, 8, 9, 11, 12, 15, 16. Gavin Simonds K.C. (with him Norman Birkett K.C., James Wylie and Bensley Wells) for Waterlow & Sons, Ld. The Bank claim that they have issued notes of a certain face value and have received nothing in exchange but the false Marang notes, bits of paper which are worth nothing, and that therefore the damage they have suffered is the face value of the notes so issued. Messrs. Waterlow dispute that. It is for the Bank to prove affirmatively that they have suffered any greater loss than the cost of obtaining the notes and the cost involved in the increased obligation which the greater number of notes circulated imposes upon them, and in the submission of Messrs. Waterlow that they have failed to do.

Apart from that question, is it in the usual course of things for a bank to pay forged notes, knowing them to be forged, as well as true? Is it in the usual course or something to be expected by the printer of the notes that the bank of issue will not take every possible step to ascertain how the false may be distinguished from the true, and having ascertained that fact will not refuse to honour the false? See Hadley v. Baxendale. F1 It was upon a consideration of those questions that the difference in the amounts awarded by Wright J. and by the Court of Appeal is accounted for. No doubt the Bank decided to pay all alike without distinguishing between the true and the false for the sake of their credit and for the benefit of the State, but they were not entitled to put upon the printers the damage so ensuing. The claim of the Bank rests upon this, that in order to remedy the in resulting from the circulation of the Marang notes they were compelled to issue their own notes in exchange.

On this assumption what damage have they suffered? On behalf of the Bank it was contended that the Bank's notes, being the currency of the country, had the same value in their hands as in those of third parties, and that contention formed the basis of the judgments in the Courts below. But the position of the third party and of a bank of issue is wholly different. If the liability of the bank is to pay in gold their liability would be measured by so much gold, but if the notes are only to be honoured in paper, the value of the paper is their only liability; and it has been found by the Courts below that there was no probability of a return to gold.

These notes do not in form contain any promise to pay, but, assuming a promise to pay to be implied, it is impossible to say that a wad of promissory notes in the possession of the bank is of the same value as if the notes were in the possession of the third party. A bank note in the hands of the bank of issue is just a piece of stationery of paper worth. One test is to see how the notes are to be replaced. The third party would have to pay the face value either in currency or services. The bank could replace the notes from their stock at the cost of the printers' bill. If the notes were burnt while in the hands of the bank, they would lose nothing; but the third party could not replace the notes except at the cost of the face value. Apart from any question of a limitation on their power of issue, the bank of issue would only lose the value of the paper. If the Bank had had to contract their currency in order to meet their liability a different question would have arisen, but the Bank have never put their claim upon any diminished power of issue. It follows that the Bank have not proved any damage beyond the paper value of the notes.

On the other part of the case - namely, as to the date at which the liability of Messrs. Waterlow should cease. If the Bank intended to make the printers liable for the payment of the false notes, as the result of their breach of contract in delivering notes without the authority of the Bank, they ought to have given notice of their intention to the printers, because that liability was not a normal consequence of their breach of contract. But assuming the printers to be under some liability in that respect, their liability should be limited to the earliest period at which the Bank could reasonably have discovered which notes were true and which false.

Stuart Bevan K.C. and Le Quesne K.C. (with them Somervell K.C. and Hon. H. L. Parker) for the Bank of Portugal. On the question whether the Bank ought to have taken steps to limit their loss all the judges agreed that the Bank were bound to give notice withdrawing this issue of Vasco da Gama notes from circulation. If the notice had stated that the Bank intended to pay all notes only so long as they were unable to discriminate between good and bad notes the immediate run on the Bank would have been much more severe and the damage, instead of being mitigated, would have been aggravated. If, on the other hand, the Bank had subsequently distinguished between good and bad notes without giving any notice to the public they would have been open to the grave charge of having misled the public by leading them to believe that all notes would be paid without discrimination. At no time, with or without knowledge, were the Bank not justified in paying the unauthorized notes, and they therefore claim the market value of the genuine notes given in exchange for the false notes until December 26, 1925, the day on which the Bank announced that the exchange would cease.

As to the argument founded on inconvertibility, if that contention was right as to the position of the Bank of Portugal, the Bank of England to-day were in the same position. It is rather a startling proposition that if the Bank of England were deprived by theft or otherwise of certain notes in circulation the Bank would be only entitled to the cost of paper and printing. Face value had been spoken of, but the true measure of damage was the market value of the genuine notes, and at all material times the market value of a note was approximately 5l. If in the ordinary way the Bank had handed out 200,000 notes they would have received assets of a corresponding value, whereas here they had received nothing except worthless pieces of paper. The general rule with regard to damages was stated by Lord Blackburn in Livingstone v. Rawyards Coal Co. F2 as follows:

"Where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation."

Applying that principle, the Bank were entitled to the market value of the genuine notes with which they had parted for no consideration. Whether the notes were convertible or inconvertible, they had a market value, and the market value of the thing of which the Bank has been deprived is the true measure of damage. By the issue of those notes the Bank were without the sterling value of the notes. In the normal course the Bank always issued notes for assets; here they had issued notes for no assets.

The Bank were under the same liability with regard to those notes as if they had parted with them for assets, and that liability was valued all over the world at 5l. No liability was incurred on notes until they were put into circulation; but as soon as they were issued a liability was incurred, and for that liability the Bank got nothing in exchange. The Bank claim for the 209,000 notes what they would have received if they had issued them in the ordinary way, but here they have issued notes for which they have received nothing. The Bank had been compelled to incur a liability, and the question is what was the value of the liability which they had incurred. As a consequence of what happened the Bank stood short in its assets. That lack is in no way affected by the fact that it was competent to the Bank to issue a corresponding number of notes out of its reserve. The liability which the Bank had incurred was to accept each of the Marang notes as of the value of 5l., whereas the notes were worth nothing: and an equivalent number of genuine notes had to be handed over to the customer. The loss which the Bank has sustained was by delivering these notes. The notes passing from the Bank by delivery have just the same value as the notes in the hands of a third party. As long as the notes were in the cellars of the Bank they had a potential value only; they acquired an actual value by being issued. Convertibility or inconvertibility simply went to market value. For all other purposes it could be disregarded. On that point the opinion of the majority of the Court of Appeal was right.

Gavin Simonds K.C. replied.

The House took time for consideration.

1932. April 28. Viscount Sankey L.C. -

These are the appeals of the Banco de Portugal (hereinafter called "the Bank"), and of Waterlow & Sons, Ld. (hereinafter called "Messrs. Waterlow"), from an order of the Court of Appeal dated March 26, 1931, varying the judgment and order of Wright J. dated January 12, 1931. The learned judge directed judgment to be entered for the Bank for 569,421l. with costs. The Court of Appeal, by a majority consisting of Greer and Slesser L.JJ., directed that judgment should be entered for the Bank for the reduced sum of 300,000l., Scrutton L.J. dissenting from that judgment, for in his view the Bank of Portugal was only entitled to the sum of 8922l., which was covered by a payment by the defendants into Court of 10,000l.

The Bank is the Central Bank of Portugal and is incorporated by Special Charter under the Laws of Portugal. Since 1887 it has held from the Government of Portugal an exclusive licence for the issue of bank notes as legal tender in Portugal and the adjacent Portuguese Islands, but this licence does not extend to the issue of bank notes for the Portuguese Colonies. At all dates material to this case the currency of Portugal was composed solely of notes issued by the Bank. The Bank act as bankers to the Portuguese Government and carry on a general banking business, having a head office in Lisbon, a branch office in Oporto, and agencies and correspondents in various towns and places throughout Portugal and the Islands.

The Governor of the Bank is appointed by the Portuguese Government and presides at Directors' meetings. The Directors at all material times selected the names of three of their number, out of which the Government in its turn selected one to act as Vice-Governor. The Directors are appointed by the general meeting of the shareholders. The Government also at all material times appointed a Secretary-General whose duties were defined by art. 66 of the Statutes of 1892. This article prescribed (inter alia) that he shall "satisfy himself of the strict observation of the Bank's statutes and regulations .... in order to be able to appreciate the situation of the Bank as regards the safeguard of the Public interest and of the fiduciary circulation." He did not vote at Directors' meetings.

Messrs. Waterlow are a well known firm of printers having their registered office at 26 Great Winchester Street in the City of London. A considerable proportion of their business consists of bank note and security printing. Under a contract dated November 27, 1922, and a repeat order under that contract dated February 20, 1924, the Bank employed them to print and supply certain bank notes required by the Bank for issue in Portugal. Under this contract and repeat order Messrs. Waterlow supplied to the Bank 600,000 notes of a face value of 500 escudos. The said notes contained on their face a portrait of Vasco da Gama and are referred to as 500 escudos notes of the Vasco da Gama type. These notes were delivered to the Bank in 1923 and 1924, and all or nearly all of them were put into circulation. The value of the escudo at dates material to this case was approximately Two Pence Halfpenny, so that a 500 escudo note was worth approximately 5l.

The notes of the Bank are at present inconvertible; that is to say, the Bank is under no obligation to replace them when presented by anything else than its own notes. The learned judge found, and the Court of Appeal agreed with him, that the prospect of the notes ever becoming convertible with gold was so remote that it might be disregarded. With that finding I agree. The amount of notes which could be issued was controlled by law. Within these limits it was subject to the policy of the Bank. The right was accompanied by conditions as to the maintenance of reserves and prohibitions as to certain classes of business.

For example: By art. 28 of the Law of July 29, 1887.

The Bank is expressly forbidden from carrying out the following operations:-

 To purchase for its own account any shares in the Bank.
 To rediscount its own bills.
 To carry out any Stock Exchange operations which cannot be immediately liquidated even if for account of third parties.
 To pay interest on any cash received in account current payable at sight.
 To promote or take part in the creation of commercial banking or other undertakings.
 To undertake any risky negotiations or insurance.
 To buy and sell, for its own account, any commercial goods.
 To possess real estate and rights apart from the City premises necessary for the carrying out of its functions, except through the effect of any assignment or public sale, or in order to secure the repayment of credits, but it will have to proceed to the liquidation of such goods (or "estate") within the shortest period possible.

Again, there was an obligation upon them to issue notes on Government service. Finally, it must be remembered that the Bank is a Bank of Issue with control and management of the currency. Its Directors were only entitled to issue notes as far as in their reasonable opinion it was right and proper for them to do so in their capacity as guardians of the currency of the country.

In the course of 1925 Messrs. Waterlow, as it has been found by the Courts below, and as they admitted on appeal, were guilty of a breach of an absolute duty to the Bank under the contracts referred to, because, without authority from or the knowledge of the Bank, they printed and delivered to one Marang van Ysselvere 580,000 notes of 500 escudos of the Vasco da Gama type.

Marang was one of a group of criminals, among whom was the Portuguese Minister at the Hague. The criminals having obtained the notes from the Messrs. Waterlow introduced them into Portugal and proceeded to put a very large number of them into circulation there.

These notes were printed either from the same plates as had been used for the notes printed for the Bank or from plates made from the same die. Each of the Bank's notes bore a serial letter and number and the signatures of the Governor and one or other of the Directors. 490,000 of the said 580,000 were exact duplicates of notes printed for the Bank and were indistinguishable from the genuine notes delivered to and issued by the Bank except by certain tests unknown to the Bank and depending on data which were exclusively in the possession of Messrs. Waterlow: These tests involved various matters, such as the existence and the significance of minute letters on the genuine and the unauthorized notes and of minute differences between the genuine and the unauthorized notes in the distance from one typographical element to another on the face of the note. The notes were delivered to Marang as to 200,000 in February and March, 1925, and as to 380,000 from August to November, 1925.

In order to facilitate the putting into circulation of very large quantities of these notes the criminals formed a bank known as the Banco Angola e Metropole. Under Portuguese law in order to constitute and operate a bank it was necessary to obtain the authority of the Minister of Finance, who was advised on such matters by a body known as the Banking Council. The Minister of Finance on June 27, 1925, authorized the formation of the Banco Angola e Metropole on the condition, among others, that the capital of that bank, the minimum figure for which he had previously fixed at 20,000,000 escudos, should be fully subscribed. This condition was accepted, and, as the criminals had already received notes to an amount of 100,000,000 escudos from Messrs. Waterlow, they were able promptly to comply with it.

The Banco Angola e Metropole, having been formed, proceeded to carry out transactions on a large scale; but their business fell under suspicion, and upon November 19, 1925, the Minister of Finance instructed the Inspector of Banking Commerce to investigate their activities. On Friday, December 4, 1925, the manager of a private bank in Lisbon called upon Dr. Ulrich, a Director of the Bank, and informed him of certain suspicious dealings affecting the Banco Angola e Metropole at Oporto, and Dr. Ulrich communicated with the Assistant Judge of Criminal Investigation. On the evening of that day a number of officials both of the State and the Bank went to Oporto. On the following day the premises of the Banco Angola e Metropole were searched by the police. Many packets of 500 escudo notes of the Vasco da Gama type were found, but apparently the notes, though new, were not consecutive, nor were the series the same. Instructions were given that all notes of this type in the Oporto branch of the Bank should be arranged in series, and also that 2000 of the notes found on the premises of the Banco Angola e Metropole should be similarly arranged. Late on the night of the 5th, Saturday, or early on the Sunday morning, the 6th, four notes, each in duplicate, making eight in all, were discovered among those in the Bank's branch, and this was conclusive proof of forgery.

The Bank's officials returned immediately to Lisbon, and on the Sunday evening a meeting of the Bank's Directors was held. The position was certainly alarming. It was obvious that there were forged notes in existence, but how, when, where and to what extent the forgeries had taken place was entirely unknown. After prolonged consideration, the Bank resolved to withdraw from circulation the notes of 500 escudos, 2nd plate, gold, on which appeared the effigy of Vasco da Gama. The notice was given in the following terms, and was published in the "Diario de Noticias" and in the "Seculo" of December 7, 1925, and other papers:-

"The Administration of the Bank of Portugal has resolved to withdraw from circulation the notes of 500 escudos, 2nd plate, gold, on which appears the effigy of Vasco da Gama.

In view of this resolution, the notes of this type and plate now in circulation are to be exchanged for others of the same or some other denomination at the Head Office of the Bank in Lisbon, at the Branch Office in Oporto and at the Offices of its Agencies on the Continent and in Funchal.

Lisbon, 7th December, 1925.

For the Bank of Portugal.




The result was a run on the Bank, and in the course of the next few days many thousands of notes both good and bad of the Vasco da Gama type were brought by their holders to the Bank or one of its branches, and for each note so brought into the Bank, the Bank handed to the holder a good note for 500 escudos.

On December 7 the Bank telegraphed to Messrs. Waterlow as follows:-

(Despatched at 2.25 P.M. Recd. 5.14 P.M.)



7th December, 1925.

Great falsification notes of five hundred escudos send expert Lisbon urgently to examine. Make investigations on your side.

Bank of Portugal,


Messrs. Waterlow replied in the following terms:-

"Camacho Rodriguez,

Bank of Portugal,


8th December, 1925.

Your cable 7th received. Arranging for expert to leave London immediately. Will wire you actual time and departure. Write fully and send specimens.


(Despatched 12.25 P.M. Recd. 1.56 P.M.)

Sir William Waterlow, accompanied by two other of his directors, had interviews with Colonel Lucas in London, who was acting on behalf of the Bank, and eventually left for Lisbon, where he arrived upon December 13. Meantime the Bank had been exchanging the notes in the way above mentioned.

It ought here to be said that no suggestion has been made or can be made, against the honesty of Messrs. Waterlow. They were, just as much as the Bank was, victims of Marang's fraud; but when Sir William Waterlow arrived in Lisbon he was an object of suspicion (as indeed the Directors of the Bank themselves had been) and was for a time kept at arm's length,

In the result, the Bank finally found itself in possession of 799,190 Vasco da Gama notes, and of these it was subsequently ascertained that 209,718 were notes printed without authority by Messrs. Waterlow for Marang, and which are hereinafter referred to as "the forged notes."

On December 1, 1925, the note circulation of the Bank consisted of two classes:

 notes issued as loans to the Government which the Government would put into circulation, and
 notes issued by the Bank for its ordinary commercial needs, against a certain specified reserve of gold much less than the face value of the notes.

The total note circulation in Portugal was about 1,700,000,000 escudos (seventeen million pounds). Messrs. Waterlow had printed and delivered to Marang notes to the value of 290 million escudos, or about one-sixth of the total note issue. Of these, notes to a value of over 100 million escudos (one million pounds) had been put into circulation. They had been put in circulation from time to time from some date in the first half of 1925. They must have passed from hand to hand. Many of them must have been paid into the Bank's head office or some branch office of the Bank, and been re-issued. On such notes the Bank would certainly be liable, and it had no means of knowing whether any note had, or had not, been re-issued.

Notes to the value of 195,630,000 escudos had been authorized against a 15 per cent. minimum gold reserved for the Bank's commercial business as bankers. Of this amount the Bank had, prior to December 7, 1925, issued about 65 million escudos. The unissued balance of about 131 million escudos constituted reserves on which the Bank could draw as and when they required to do so. It may here be stated that, as a result of Messrs. Waterlow's breach of contract, the note issue was increased by approximately 104,859,000 escudos, and the unissued balance was thus considerably reduced.

Within a short space of time, i.e., by July 19, 1926, the Bank obtained a considerable increase in its power to issue notes. The Government, by the Prime Minister, had approved of the original action of the Bank on December 6, 1925, and the delay in regulating the position, as appears from the preamble to the decree of July 19, 1926, resulted from a change of Government, which interrupted negotiations. That decree authorized:

 an issue of a hundred million escudos, to be repaid out of the anticipated indemnities from Waterlows. It is not suggested that this loan from a third party can be used to reduce damages due from Waterlows;
 a further issue of a hundred million escudos to be used for commercial operations;
 a further issue of 125 million escudos, to be used in colonial development, which does not affect this case.

The plaintiffs, the Bank, issued a writ upon April 5, 1928, claiming damages for breach of contract and/or negligence and/or conversion. In their statement of claim, the plaintiffs added a count under the Copyright Act, but this and the claims for negligence and conversion were not pressed on appeal, and they relied upon the breach of contract only. Such breach of contract is set out in para. 9 of their statement of claim and is as follows:

"In breach of the express terms of the said contract and/or negligently and in breach of the implied terms as set out in paragraph 4 hereof and/or negligently and in breach of the duty set out in paragraph 5 hereof, the defendants between January, 1925, and September, 1925, without the authority of the plaintiffs printed from the said plates and/or from plates made from the said die or dies on paper made to the plaintiffs' specification and bearing the watermark 'Banco de Portugal' and delivered in London to one Marang a Dutchman about 580,000 banknotes of the value of 500 escudos each of the said Vasco da Gama design purporting to be banknotes of the plaintiff Bank."

The particulars of damage originally amounted to the sum of 1,115,613l., but the Bank professed itself willing to give credit for the sum of 488,430l., which they had received in the liquidation of the Banco Angola e Metropole, and so the net claim was 610,392l.

By their amended defence, Messrs. Waterlow denied that the contract of November 27, 1922, was subject to the implied terms alleged; they denied that they were guilty of any breach of the express or implied terms of the contract; they denied that the Bank had suffered any loss, and alleged in the alternative that, if the Bank had suffered any loss, such loss was caused solely by the Bank's own voluntary act in withdrawing from circulation the Vasco da Gama 500 escudo notes and exchanging them for other notes, although the forged notes or some of them which were in circulation were distinguishable from the authorized ones and although the Bank were under no liability to pay the unauthorized notes; and in the further alternative they alleged that any damage was caused by or contributed to by the negligence of the Bank.

In this state of the pleadings, the matter came before the learned judge. In effect he rejected the contentions of Messrs. Waterlow, both as to the amount of damage and the measure of damage. He, however, was of opinion that by December 16, the Bank knew (or ought to have known) the tests by which they could distinguish some of the forged notes from the authorized notes, and he held that from that date Messrs. Waterlow were not liable for damages in respect of the good notes which they gave in exchange for forged notes, and upon this basis gave judgment for the amount above referred to, and not for the whole of the Bank's claim.

When the matter came before the Court of Appeal, all the learned Lord Justices agreed that the Bank were justified in calling in the Vasco da Gama type notes and exchanging good notes both for the authorized and forged notes, but Greer and Slesser L.JJ. came to the conclusion that the Bank knew (or ought to have known) how to distinguish between the authorized and the forged notes by December 10, instead of by December 16, as Wright J. had held, and acting upon this finding they reduced the damages to a round sum of 300,000l. to cover all items. Scrutton L.J. took a contrary view. He was of opinion that the Bank were justified in exchanging all notes up to as late a date as December 26, but he also held that a different measure of damages applied - namely, that the only loss which the Bank had really suffered was the loss incurred in printing new notes to give out in exchange for the Vasco da Gama issue.

In the result, judgment from the Court of Appeal was given for 300,000l., and from that the present appeal is brought.

The main questions in the appeal are briefly:-

 Whether the Bank, issuing an inconvertible currency, i.e., having a right to issue notes but no obligation to honour them otherwise than by giving in exchange other notes, until some future return to convertibility at a date so remote and unlikely to occur that it could not be taken practically into account, suffered any other than a merely nominal loss (apart from the cost of printing) when they called in bad notes put into circulation by forgers and gave good notes in exchange for them.
 Whether in the circumstances of this case the bank, when they gave in exchange for a forged note of the face value of 500 escudos a good note of that face value, could properly be said to have suffered a loss of 500 escudos, with the result that Waterlows, who are liable by reason of a breach of contract which enabled the forged notes to be put into circulation, are bound to pay to the Bank 500 escudos converted into sterling at the rate current at the date of the loss.
 Whether the Bank gave evidence of, or proved, any loss at all.
 Whether, if the Bank proved any loss, such loss was not caused in whole or in part by the voluntary action of the Bank themselves or was not in whole or in part such a loss as could not fairly and reasonably be considered as arising naturally from the breach of contract or such a loss as could not be reasonably supposed to have been in contemplation by both parties at the time of making the contract as the probable result of the breach, or whether the loss was not aggravated by the failure of the Bank to take reasonable steps to limit the loss.

Messrs. Waterlow, on appeal, did not dispute the proposition that they were guilty of a breach of absolute duty under an implied term of the contract.

It will be convenient to take first the question whether the Bank were justified in exchanging new notes for the Vasco da Gama notes (both authorized and forged) as and when they did. It will be observed that upon this point we have concurrent findings in the Courts below. Both Wright J. and all the three members of the Court of Appeal held that they were, the only difference of opinion being up to what period they were so justified.

In coming to a proper determination of this question, it is important to recollect the position of the Bank both before and after the discovery of the forgeries. It will be recollected that the Bank was in effect the National Bank of Portugal, the sole issuing Bank in that country, and the Bank upon which the credit and currency of the country depended. This appears from the answers given by Dr. Ulrich in his examination-in-chief:-

"Q. 286. Supposing that you had refused to pay any Vasco da Gama notes, what would the effect have been on the public as regards your issue of notes altogether, in your opinion?

I think the effect would be very extremely serious, because the people, seeing that the Bank were refusing a note of a certain type, would easily have been inclined to think that next day another can be refused in the same way. In these conditions there would have been a general discredit for all the notes of the Bank, that means for the total currency of the country. I cannot really easily foresee the effects coming from such a measure, but it is easy to understand that if anybody has merchandise in his power of a certain and definite value he would have refused to exchange his merchandise against a piece of paper of a doubtful value or discussed value, so the country would have been brought to a general stoppage for the economical life of the country, and naturally the people in Portugal would have taken the most severe violences against the Bank, and I am sure that a revolution would have been brought about by this fact.

Q. 287. In your opinion, that would have been the internal result in Portugal?


Q. 288. What about the external result as regards Foreign Exchanges?

I think the market for Portuguese currency abroad would have been suppressed at once; no bank would have been willing to sell escudos when they knew the escudos were paid in paper of doubtful value and of discussed value, so the Foreign Exchanges of the country probably also would have been stopped."

Similar evidence was given on the Bank's behalf by other witnesses called by them, and the learned trial judge said:

"The justification for acting with such promptitude which is put forward, and I think put forward with foundation, was that it was already known and could not be suppressed that there was this great falsification of notes going on, that the only way to avoid a financial crisis and an entire upheaval of the currency was to withdraw this issue, and that there was no opportunity of further delay because the consequences of delay would have been too serious to contemplate. ....

At least 4000 notes ready to be issued had been found in the Banco Angola e Metropole, and what the plaintiffs did was simply done in order to maintain the credit of their currency and of their Bank, and was, so far as I can judge, and as I hold, done reasonably in all the circumstances. It was a necessary and indeed, in all the circumstances, an inevitable consequence of the falsification and circulation of these spurious notes."

Scrutton L.J., commenting upon this, says:

"The judge below has found that by December 16 the Bank might have discovered a means of identifying some of the forged notes. The Bank by Government Decree stopped paying all Vasco da Gama 500 escudos notes after December 26. Wright J. has deducted from the damages 80,000l., for notes paid after December 16. As he finds that the Bank were justified in their action on December 7 in calling in the issue and paying all notes, he must have found that they would have been justified when they could distinguish the forged notes, which innocent holders could not do, in refusing to pay some forged notes, while paying others. Such an action in my opinion would destroy all confidence in the paper currency. It was the Bank's own printers who had from the Bank's own plates wrongly put this unauthorized currency on the market. It was indistinguishable to innocent holders from genuine currency, and I cannot think the Bank was bound to sacrifice innocent holders and the reputation of its national currency to protect the printers, the wrongdoers."

In England the law is that a person is not obliged to minimize damages on behalf of another who has broken a contract if by doing so he would have injured his commercial reputation by getting a bad name in the trade: James Finlay & Co. v. N. V. Kwik Hoo Tong Handel Maatschappij. F3 The evidence is that the Bank - remembering always that they were the issuing Bank of the paper currency - had to protect before anything else the confidence which such currency inspired in the Portuguese public. "What confidence," they asked, "would all the other notes of the Bank of Portugal merit if the Bank did not adopt such a policy?" "It is one," they say, "always adopted and similar to that adopted as a rule by banks of issue, even when they can allege the forgery is manifest and that the public has not taken the precautions necessary in receiving false notes." I have come to the conclusion that the Bank would have been failing in their duty to their shareholders, their customers and their country if they had not taken the step they did.

In my opinion these findings are correct, and the Bank had no alternative on December 7 but to do what they in fact did. They were in a position of extreme difficulty and extreme danger, caused, as I think, by the unfortunate and unwitting breach of contract on the part of Messrs. Waterlow.

As the Bank urge, for a country to find that what it believed to be a substantial portion of its legal wealth was nothing more than worthless pieces of paper instead of genuine notes of the Bank would have created an economic panic and confusion which would have caused the gravest damage to the credit of the Bank and might even have shaken the whole economic and commercial life of the country.

I now pass to a consideration of whether December 10, as Greer and Slesser L.JJ. held, or December 16, as Wright J. held, or December 26, as Scrutton L.J. held, is the correct date for determining when the Bank's knowledge was of such a character as disentitled them from exchanging new notes for the Vasco da Gama notes, both authorized and forged. I would add here that the learned counsel at the Bar of your Lordships' House, arguing on behalf of Messrs. Waterlow, endeavoured to persuade the House that the Bank ought not to have acted so precipitately in giving notice of calling in, and that they must have known by December 9 how to distinguish between the authorized and the forged notes, and so that they ought not to have exchanged any more after that date.

This is largely a question of fact, but, having come to the conclusion that the Bank were entitled to issue their notice on December 7, I reject the argument for Messrs. Waterlow that the Bank acted too precipitately, and the only question therefore remaining is whether December 10, December 16 or December 26 is the proper date to take as being that upon which the knowledge of the Bank was such as disentitled them from paying out further good notes.

It appears to me that Scrutton L.J. was right for his reasons above referred to in rejecting the contention that December 10 or December 16 was the date to be taken as the one upon which the Bank knew, or were in a position to know, how to distinguish certain of the notes. The Bank in fact exchanged new notes for forged notes as late as July, 1927. Logically I can see no reason why they should not claim from Messrs. Waterlow any damage properly flowing in respect of notes so exchanged so late, and upon this showing even the date fixed by Scrutton L.J. of December 26 would have to be reconsidered. I agree, however, that December 26 is the proper date, and for the following reason. By a notice issued by the Ministry of Finance in Portugal it was ordered that December 22 should be fixed as the last day for the exchange of notes. This date was subsequently extended to December 26, and I am content to leave it at that.

What then is the amount of damages to which the Bank are entitled upon that date, subject to the question of the correct measure of damages?

Taking December 26 as the date, it remains to be considered how the sum of 488,430l. which the Bank recovered in the liquidation of the Banco Angola e Metropole is to be dealt with. It was contended by Messrs. Waterlow that this sum ought to be treated as salvage in respect of the total loss suffered by the Bank in respect of the unauthorized notes. It was said that in the present action the amount to be recovered was in respect of part only of those notes - namely, 209,718 less 16,000 notes, and that any credit to be given must be based on the same subject-matter - namely, salvage in respect of 209,718 less 16,000 notes, i.e. twelve-thirteenths of 488,430l. - namely, 450,860l. In my view this is not the true principle applicable. Legally, Messrs. Waterlow may not be entitled to any credit in respect of this sum of 488,430l., as the amount was recoverable against different parties and on a different cause of action. The Bank, however, do not desire to stand upon their strict rights, and in my opinion, if the total amount to be recovered from Messrs. Waterlow added to the sum of 488,430l. exceeds the total loss actually incurred, Messrs. Waterlow should have credit for such excess. The Bank's total loss was 1,092,281l. plus 6541l. Against this, credit should be given for 488,430l., leaving a net loss of 610,392l. This is the principle laid down by the Court of Appeal in the case of The Morgengry and The Blackcock, F4 and it is that principle which in my view should be followed in the present case.

I now pass to the question: What is the true measure of damages?

Two points are taken on behalf of Messrs. Waterlow. They contend:-

 The loss, if any, suffered by the Bank was caused in whole or in part by the voluntary action of the Bank and/or was in whole or in part a loss which could not fairly and reasonably be considered as arising naturally from Waterlow's breach of contract, and was a loss which could not reasonably be supposed to have been in contemplation of both parties at the time of the making of the contract as the probable result of the breach.
 The loss suffered by the Bank, if any, was merely nominal, being the present value of the liability at an undetermined and undeterminable future date to give gold or other value for the good notes it issued in exchange for bad notes.

As to (1.), the law is as follows: The leading case in English law is that of Hadley v. Baxendale, F5 where it is laid down by Alderson B., giving the judgment of the Court:

"We think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be either such as may fairly and reasonably be considered arising naturally - i.e., according to the usual course of things, from such breach of contract itself - or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract."

It was similarly stated by Lord Blackburn in the House of Lords in Livingstone v. Rawyards Coal Co. F6 in these words:

"Where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation."

There is no doubt as to the law; the real difficulty is to apply it to the peculiar facts of this case.

The first question is:

"Was this loss one which could reasonably be supposed to have been in contemplation by both parties at the time of the making of the contract as the probable result of the breach?"

This rule has often been criticized on the ground that people when they make contracts do not contemplate their breach. Be that as it may, I have come to the conclusion that Greer L.J. was right in taking the view that it would be naturally in the usual course of things, and would be within the contemplation of the parties

 that in circumstances like those which happened in the present case, the Bank would be compelled for their own protection to issue a public notice informing the holders of their notes that the only notes of which forgeries had been discovered were the Vasco da Gama issue; and
 that they would also be compelled in the interest of their own credit and currency to act reasonably in the matter, and
 that it would be reasonable to exchange any of those forged notes which were presented for payment for valid notes of an equal value.

Once this is found, as it has in my view been rightly found in this case, that the Bank acted reasonably, and it is also found that Messrs. Waterlow committed a breach of contract, the resulting consequences from such reasonable action must be damages which the Bank are entitled to receive in respect of breach of contract, because they are damages fairly and reasonably to be considered as arising naturally - i.e., occurring in the usual course of things from such breach of contract - as the probable result of the breach.

As to (2.), I now turn to the last and, in my opinion, most difficult part of the case.

Was the loss suffered by the Bank merely nominal and was the only sum recoverable by them the cost of printing and paper in regard to the new issue?

Upon this point Wright J. said:

"In Portugal these notes are currency. They are the currency of Portugal. They can purchase commodities in Portugal, including gold, which after all is only a commodity like any other, though it is raised in financial affairs to a special pre-eminence as a convenient medium for fixing values, they can buy foreign exchange, that is sterling or dollar exchange, they can buy any exchange in any currency which is convertible and they do that because they have behind them the credit, that is the liability, of the Bank of Portugal."

And Greer L.J. states it in a similar way. He says:

"Every 96 escudos issued by the Bank in form of paper notes in exchange for the Marang (forged) notes was worth 1l. in English money, because it would buy in Portugal, and by exchange all over the world, the same amount of goods as the pound sterling would buy. ....

In my judgment the Bank are entitled to say to the defendants 'By your wrong I lost a certain number of escudos worth x pounds, give them back to me in English money at the rate of exchange at the date of my loss.'"

In the present case the Bank, by reason of Messrs. Waterlow's breach of contract, had to increase their note issue by 104,859,000 escudos, and received in exchange for each bank note no value at all, but only worthless bits of paper.

Upon each of the good notes so exchanged, the assets of the shareholders were diminished to the extent of the liability which the Bank assumed for the good note which they had given in exchange for the worthless note.

Some confusion appears to me to have arisen in this case by dwelling too much upon the fact that the notes were not convertible into gold. In my opinion that fact has nothing to do with the case. In a country where there is a managed currency a note when issued by a Central Bank becomes part of the currency of the country and obtains a certain value which may for the moment be called its market value. The fact that it is not convertible into gold is reflected in the price the note fetches in the terms of any foreign exchange. We are not here considering the case of an unlimited right to issue notes. The essence of the right conferred on the bank of issue in this case was the ability, within limits allowed by law, to print and issue its notes as currency and for value. The notes are the currency of the country, and have the value of that currency when issued. Whatever may be the conditions imposed as to reserves and whether the currency is convertible or inconvertible, a bank of issue receives value for every note which it issues.

This consideration has to be kept in view during the whole of the present case. It must never be forgotten that the Bank was a bank of issue. The notes may be advanced as loans to the Government or private persons; they may be used to buy gold or securities, to discount bills or to pay the Bank's debts, and the notes may also be received from a customer of the Bank in order to reduce an overdraft at the Bank. In every instance the Bank obtains the currency value of the notes, or may receive it, in discharge of a liability due to the Bank.

Analogies may be misleading, if not dangerous, in these peculiar and unusual circumstances. The simplest way of posing the problem is to imagine two persons coming into the Bank at the same time, each of them wanting a good 500 escudos note. The first is an Englishman who wants to get some Portuguese money. He hands over to the Bank five English pounds, and gets in return a 500 escudos note. The other person hands over a forged note, and also gets a 500 escudos note. What is the position of the Bank? In the first case it has obtained in exchange for the 500 escudos note five pounds in English money; in the second case it has got in exchange for the 500 escudos note a worthless forged note. It is not possible to say that in the second case the Bank has suffered no damage because it could print and issue a third 500 escudos note should it so desire to do. For that note it could also have obtained value. In truth it has lost the face value of the second note by reason of the fact that it has only got a worthless note in exchange.

I am, however, unable to accept in its entirety the argument put forward by the Bank in their Reason 16, where it is stated that the Bank's notes, being the currency of the country, have the same value in their hands as in those of third parties. What exactly is meant by the words "in their hands" it is difficult to appreciate. A bank note is, after all, merely a promise to pay in some form or other. Supposing the Bank had had in its cellars, say, for example, 1000 of these notes, and owing to the negligence of some contractor who happened to be engaged in repairing the premises, a fire had broken out and all the new unissued notes in the Bank's cellars had been burnt, it would not be possible to contend that the contractor whose negligence had caused the loss of the notes would be liable for their face value. He might in such an instance be liable for the cost of paper and printing of each note, but it is a completely different position when the notes, instead of remaining in the cellar, are rightly, as is found in this case in the circumstances, put into circulation by the Bank. Then their value is entirely changed. Again, it is possible to conceive of cases where a person who has been deprived of a chattel by the negligence of another is entitled to recover from such other the replacement value of such chattel, but the present case is not an example of that character. Here the issue of the note and putting it into the currency of the country, which the Bank were entitled to do, makes all the difference.

For these reasons, I am of opinion that the appeal of the Bank succeeds and that judgment should be entered for the Bank for the sum of 610,392l. The appeal of Messrs. Waterlow should be dismissed.

Case Judgement
Table of contents
  Judgment by Viscount Sankey LC (including background)
  Judgment by Lord Warrington of Clyffe
  Judgment by Lord Atkin
  Judgment by Lord Russell of Killowen
  Judgment by Lord MacMillan

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