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Banco de Portugal v. Waterlow and Sons Ltd

[1932] A.C. 452

(Judgment by: Lord Atkin)

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:
Lord Atkin

My Lords, in this case your Lordships are, I think, agreed that, as the result of the breach of contract by Messrs. Waterlow, the Bank of Portugal issued 209,718 500 escudo notes in exchange for forged notes innocently printed by the defendants. The question is what damages can be recovered by the Bank. The contention of Messrs. Waterlow is that the Bank, when it issued good notes to the face value of over 100 million escudos in return for no consideration, suffered no damage at all except the cost of printing the good notes.

This would have appeared to me a departure from the ordinary principles of assessing damages; but it has found favour with more than one judicial personage for whose opinions I have unfeigned respect, and was urged with much apparent zeal by eminent counsel: so that obviously it demands careful examination. The difficulty, it appears, only arises where the person issuing the notes is a bank of issue and where the obligation expressed in the note is not to pay in gold but to pay in paper currency, i.e., other notes of the Bank. In such cases it is said the Bank have only parted with bits of paper and their damage is completely measured by the cost of reprinting the bits of paper.

The argument strikes home at the present time where our currency is in the main a paper currency; and where the Bank of England are under no liability to pay their notes in gold. I hope to satisfy your Lordships that if the Bank of England by fraud or breach of contract are induced to issue a million pounds worth of notes for nothing they are entitled to recover against the wrongdoer a million pounds in damages. The result of the present contention is sufficiently striking. If the issue of 10,000$ good notes by the Bank of Portugal for nothing involves them in no loss, it would seem to result that the issue of a similar amount for goods or obligations of an equivalent value would be complete gain. The Bank, therefore, when it creates a good debt for 10,000$ by advancing that amount in notes to its customer will appear to have increased its assets by 10,000$ without adding to its liabilities; similarly, when with the same sum it buys a 100l. gold bond or the equivalent amount of bullion. It follows that it makes no difference to the financial position of the Bank whether in exchange for a good note it receives a good note or a bad note. I should have thought this result, in the language of one of your Lordships, "manifestly impossible"; but rules of law have to be tested in these days, and must survive the application of first principles.

A bank note is a promissory note issued by a bank payable on demand. The English note contains the promise on the face. The Portuguese note does not, but there is competent evidence in this case that the note has the same effect. So far the banker issuing his note incurs precisely the same liability as a merchant issuing his note. If either fails to pay he is liable for the face value of the note. One Bank becomes alone entitled to issue notes; and let us assume that they have become currency so that they can be tendered in discharge of a debt: the position of the Bank remains the same. It is liable on its note. If its note is payable in gold, then to a claim on a note the Bank must pay in gold; otherwise, on debts in general, the Bank as well as private traders will pay in currency; and, as I have said, on default will be liable to judgment for the face value.

In any civilized State it will not be permitted to issue notes to an unlimited amount; it will, if honestly conducted, in any case determine its obligations by its possible resources; but the State will require that behind the promises to pay there stand solid resources in the form of gold and liquid securities; and will impose a positive restriction on the issue of notes beyond an amount which it considers necessary. But this has no bearing on the liability of the Bank to pay the face value of a note when issued. Now let us assume that the State alters the law by decreeing that the bank notes need no longer be paid in gold. While that decree lasts the notes are inconvertible, the currency is in the ordinary sense a paper currency.

This happened in Portugal in 1891 by a moratorium directed to payment in gold which has been continued in Portugal ever since. The position has not altered. The merchant is in precisely the same position as before; he must pay in currency which will as before be notes, but now inconvertible notes. If he fails to pay he can be sued for the face value of his promissory note. The Bank is for the first time put in the same position as the merchant; it is bound to pay on its note; but it need only pay its note in currency, i.e., in its own notes; and if it will not or cannot so pay, it can be sued for the face value of the note. Mr. Simonds, for Messrs. Waterlow, produced an analysis of the obligation of the Bank in issuing an inconvertible note with which in substance I agree. It is:

 to pay in other notes;
 when there is a return to gold, to pay in the decreed amount of gold;
 if other currency is decreed, to pay in that other currency.

But how this helps him it is difficult to see; for on examination it will be found that the obligation of a trader on his note is precisely the same, except that (2.) will probably only be to pay in notes convertible into gold instead of paying in gold itself. Now in the case of a private trader it appears to be conceded that his loss in similar circumstances would be measured by face value. On this analysis the obligation of the Bank would appear to be the same. That it meets its obligation on its note by issuing a further note seems to have no effect upon the nature or amount of the original obligation; the original obligation is met by a renewal, the Bank have only gained time, not increased or decreased an obligation which would be measured just as before. They have in fact done exactly what the merchant has done: they have paid in currency; and their obligation is measured in the same way. If they had an unrestricted right of issuing notes their obligation would not be altered; they would still be liable to be sued on default for the face value of the note, but the effect of the unrestricted power would presumably be that the face value of the note would have a much lower exchange value than if there were a restricted power: so that the Bank would either have received little value originally or the holder of the note would intermediately have suffered loss on the diminution of the note value.

But, in fact, in the ordinary course of civilized government, as in Portugal, restrictions still continue. In the present case in 1925 the issue of notes by the Bank for commercial purposes was restricted to 195,000,000$, of which they had issued 64,000,000$, leaving a power to issue of 131,000,000$. In addition, the State from time to time had authorized the Bank to issue notes for State purposes, supporting these notes by a borrowing from the Bank secured by State marketable bonds. Restrictions as to proportions of gold and securities reserves still continued in existence so far at any rate as the issue for commercial purposes was concerned. Let us assume, as might well have happened, that the forged issue, instead of amounting to 100,000,000$, had amounted to 131,000,000$. If the Bank had taken the same action they would have issued promissory notes to the full extent of their legal power. When sued on the notes so issued in exchange for the forged notes they could not have issued their notes in payment; they could have been sued for 131,000,000$, and judgment must have gone against them for that sum.

Of course, this never would have been permitted by the State, but ex post facto relief has nothing to do with the question of legal obligation. I therefore find the position to be that the Bank by issuing its note like the trader issues its promise to pay a fixed sum; issues a bit of its credit to that amount; like the trader, it is bound to pay the face value in currency; like the trader, it is liable on default to judgment for the face value exigible out of its assets; and, like the trader, if it is compelled by the wrong of another to incur that liability, its damages are measured by the liability it has incurred.

It may be noted that this liability to pay the face value is not in the least affected, as has been suggested, by the question of convertibility. Whether the obligation is to pay in gold or in paper, the liability remains the same to pay 500 escudos, and a judgment on the note would be for precisely the same sum. The exchange value and the face value are quite different matters. 500 escudos in gold will exchange for many more goods and much more foreign currency than 500 escudos in paper; as Messrs. Waterlow would have found to their cost, if they had printed these notes when they were convertible into gold. The damages then claimed would have been twenty million pounds sterling instead of a million.

Another way of illustrating the position seems to be this. If a person is wrongfully induced to part with a valuable thing, whether it be goods or choses in action, his measure of damages is the value of the thing at the time he parted with it. The cost of replacement does not enter into the measure of damages at all. If a man is fraudulently induced to part with 500 standards of timber he recovers the value at the time; it is quite immaterial that he could have replaced the timber - say, from the Russian market - at a small portion of the value. If he manufactures for 1d. articles which can sell for 6d., the measure of damages against the wrongdoer is 6d., not 1d. So if he was by fraud induced to promise to deliver 500 of the 6d. articles so that the contract could be enforced by an innocent holder of the contract, it appears to me that on well established authority the damages would be 12l. 10s., not 2l. 1s. 8d. This means that, whether he parts with goods or parts with an obligation, the measure of damages is the market value of what he parts with, which means what it will exchange for; and this necessarily means in the case of an obligation expressed in currency of the country the face value of the obligation. If he incurs an obligation to pay pounds sterling, you do not inquire at what cost he will acquire the pounds sterling necessary to fulfil the obligation; he may get them by getting some one to produce an article at much less cost which he can sell for the equivalent sterling; he may get them from a benevolent uncle or from some one who for a small premium has undertaken to make good his loss.

Whatever the liability incurred, the measure of damages is market value, which in the case of an obligation to pay currency is face value. Some confusion has been introduced into the discussion by considering the question as though the Bank had "lost" the bank notes. If the notes had been "lost" before the Bank had made them the Bank's contractual obligation by delivery the proposition of the defendants would be correct. The notes in such a case are nothing but a collection of bill stamps completed, but not delivered; to destroy them would but have the same result as burning a man's cheque book whether the cheques were filled up and signed or not. I doubt myself whether Reason 16 of the Bank's case ever meant to contend anything so unsound as is suggested; it was probably meant to be read together with the rest of the reasons. But I am quite satisfied that such a fallacy never entered into the head of such an experienced lawyer as Wright J. Throughout his judgment he is speaking of the liability of the Bank on the notes, and he finishes his judgment on this point by these words:

"They say they were damaged, by having to assume liability on these notes without getting anything in return. I think this argument is correct, and I think these notes must be taken for this purpose at their face value just as they would be if they had been issued by some other institution that is not a bank of issue."

I have already stated my grounds for believing this statement to be correct. For my part I cannot see the way to decide this case for Messrs. Waterlow without reversing a number of authorities which have governed our commercial law, as I understand it, from earliest times.

There is one final and conclusive proof of the fallacy of the defendants' contention to which I have not yet heard any answer. By issuing a note the Bank provide the holder of it with a piece of currency which he can bring to the Bank the next day and compel the Bank to receive in discharge of his overdraft or in payment under a contract to buy securities or bullion. By issuing 100 million escudos in notes they provide the public with the means of coming to the Bank and depriving it of 100 millions' worth of assets in debts, securities and gold. I say debts, for even Messrs. Waterlow's contention does not suggest that a debt payable in paper currency is worth nothing, or that if the debtor is solvent it is not worth its face value.

If the Bank releases a debt of 500 escudos it loses 500 escudos. If it parts with 500 escudos' worth of gold it loses 500 escudos; but if it issues for nothing a 500 escudo note to-day by the return of which to-morrow the debt of 500 escudos is discharged or the 500 escudos' worth of gold is bought and paid for it loses nothing. I refuse to proclaim to business men in this country or abroad that our law is so unreasonable. It is with respect no answer to say that when the note is returned it can be used again for value. In fact, strictly speaking, it is not available; the note when returned is discharged, and the reissue of it creates a fresh obligation; but the answer to that suggestion is that notes issued for value can also, when returned, be reissued; so that the contention again amounts to this that - note + value = - note, a proposition which I do not wish to qualify with an epithet.

On the general question as to the number of notes in respect of which damages are to be claimed which turns upon the day upon which it could be said that the Bank no longer reasonably could continue to pay good notes for bad, I agree entirely with the view expressed by Scrutton L.J. I put the question in that form, for it was conceded at the bar that at any rate there were some days at the beginning in which the Bank's action was reasonable and was the natural result of the defendants' default. Without such a concession I think the views expressed by all the judges below correct on this point. The majority of the Court of Appeal limited the damages by fixing on December 10 as the day upon which the Bank could have obtained full information if they had acted reasonably. I cannot agree with this. It seems to me disproved by the fact that Messrs. Waterlow, though on December 9 they had reason to suspect the Marang transaction, did not in fact give the necessary information on that day or the 10th, though they were in fact writing to the Bank on that day; in fact, they never imparted the relevant information at all except in a deposition to the police magistrate. I also think that the trial judge, with whose admirable judgment I agree on almost every other point, took too early a date for closing the transaction. It seems to me that once the exchange began it had to continue until the end of the period fixed by the Bank in conjunction with the Government, which is December 26. On the whole I think that notes exchanged after that date must be treated as benevolences by the Bank.

It only remains to consider how far the damages are to be reduced by the sum recovered from the actual conspirators, a sum of about 400,000l. Wright J. has apportioned this sum over the total loss of the Bank, thus reducing proportionately so much of the total loss as has been recovered from Messrs. Waterlow. This seems to me to be incorrect in principle. The Bank's claim against Messrs. Waterlow would be say 1,000,000l., but they cannot recover more from the defendants than their nett total loss. This is to be ascertained by taking the total amount of their loss, not merely that part of it which is recoverable from Messrs. Waterlow, and deducting from the total the amount recovered elsewhere. This is the principle laid down in The Blackcock, F9 where a ship was injured by the negligence of both tug and tow. The owners recovered judgment for the full amount of the damage from the tow, but only obtained a sum of 850l. from the proceeds of the judgment: they then proceeded against the tug and it was found that both were to blame; the plaintiffs therefore were only entitled to half their damage, about 2000l. But it was held that the defendant was not entitled to credit for either the whole or a proportionate part of the 850l., for the two sums together did not make up the total loss. The decision seems to fit this case exactly, and I think is rightly decided.

The result is that the Bank's total loss on 209,718 false escudo notes paid by the Bank at the agreed rate of exchange is ... £1,092,281
To this must be added the cost of the genuine notes printed by Waterlows and rendered valueless .... 6,541
The total amount recovered from the conspirators is agreed at ... 488,430
The Bank's nett loss is therefore. . . £610,392

The actual notes paid up to December 26 exceed 200,000, so that the total claim against the defendants without any credit far exceeds 610,392l. The result is, after being given credit against the total loss suffered by the Bank, the plaintiffs are entitled to judgment for 610,392l. In my opinion, therefore, the appeal of the Bank should be allowed, and the judgment of the Court of Appeal should be set aside, the judgment directed by Wright J. to be entered for the plaintiffs should be varied by increasing the sum there mentioned to 610,392l., and the plaintiffs should have the costs here and in both Courts below. The appeal of the defendants should be dismissed with costs here and in the Court of Appeal.

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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