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Banco de Portugal v. Waterlow and Sons Ltd

[1932] A.C. 452

(Judgment by: Lord Russell of Killowen)

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 Russell of Killowen

My Lords, both in the Court of Appeal and in this House, Messrs. Waterlow admitted that their contract with the Bank of Portugal contained an implied term that they would not print or deliver Bank of Portugal bank notes without the authority of that Bank, that in printing and delivering the notes to Marang they had committed a breach of that term, and that they were liable to the Bank in damages for that breach. The case was still further narrowed here, because the Bank based their claim to damages solely upon breach of contract. The arguments related only to the amount of such damages; other matters which have at one time figured in the case, such as conversion, negligence and passing off, may be disregarded.

The case divides itself into two very distinct branches - namely:

 consideration of the question whether the Bank have proved that Messrs. Waterlow's breach of contract has caused them damage beyond a certain sum of 8922l.; and
 consideration of the conduct of the Bank in treating Marang notes as if they were authorized notes, particularly in relation to the question whether any date can be fixed on or after which the Bank could no longer so act at the expense of Messrs. Waterlow.

The sum of 8922l. above mentioned represents the cost of printing

 the genuine notes which were withdrawn from circulation, and
 the notes which were given in exchange for Marang notes.

This damage, it is admitted, the Bank suffered. To that extent damage, as a result of Messrs. Waterlow's breach of contract, was proved.

I will start with the first branch, which raises a problem both novel and difficult.

The Bank's claim is simply this: That having given 209,718 good notes in exchange for mere bits of paper, they have lost the face value of each note so given in exchange. The loss of 500 escudos is, according to the Bank, the inevitable consequence of the gift of the note. The language in which this loss is expressed varies at times. In para. 31 the Bank's case here it is stated that:

"The Bank claim the value of the escudos which they had to part with for nothing."

In para. 39 they say:

"The Bank paid out 104,859,000 escudos in exchange for unauthorised notes. At .... the then rate of exchange the sterling equivalent of this sum is 1,092,281l."

They treat the matter as though, being the owners of assets worth over a million sterling, they had parted with those assets (or had incurred an immediate liability be part with assets of that value) receiving nothing in return. Therefore they claim that they did in December, 1925, suffer, and have now suffered, damage to that amount.

Wright J. accepted this view. As I read his judgment he treated bank notes while in the hands of the Bank as of the same value as in the hands of any other person, and held that the Bank therefore lost that value when they issued a note in exchange for a Marang note. The pith of his judgment upon this point is contained in five lines in which he says:

"They say they are damaged by having to assume liability on those 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."

Those five lines are the basis of his judgment on this head, and are re-echoed in the sixteenth reason of the Bank's case here - namely:

"Because the Bank's notes being the currency of the country have the same value in their hands as in those of third parties."

Greer L.J. says:

"Every time they issued good notes to the value of 500 escudos in place of worthless notes, they lost the market value of 500 escudos."

In another passage he phrases it thus:

"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.'"

And the Lord Justice makes this additional statement:

"If my purse containing 5l. is stolen I do not recoup my loss because I have an unused balance in my bank out of which I can draw by cheque another 5l. The damage I have suffered is still 5l., not merely the 2d. I have to pay for the cheque form."

Here again is Reason No. 16.

Slesser L.J. seems to rest his judgment on the question whether the Bank had established damage beyond cost of printing, upon a twofold basis. His language is as follows:

"Now in the case of the issue to cover the exchange of the Marang notes, the Bank received nothing in respect of this issue. To all intents and purposes it gave away 209,000 odd notes, worth on the exchange about 5l. each, receiving nothing in exchange; and I cannot see in these circumstances - the notes of Portugal being currency within that country and exchangeable as we are told at 96 escudos to the £ in London - why the Bank cannot say that by being compelled to issue this currency for no value, and thus proportionately to deplete their further power to issue, they have suffered damage to the extent of this value of the notes."

All three judgments are founded upon this view: That the Bank in December, 1925, suffered damage to the extent of over a million pounds sterling, by having in that month paid away 104,859,000 escudos.

If this view correctly represents the position, then the Bank would on the giving of each good note in exchange for a bad note become in fact poorer by the face value of the good note, and there could be no doubt that damage to that amount had been sustained by the Bank. But in my opinion this view does not represent the facts, but overlooks the exceptional situation which arises when a bank of issue issues notes constituting an inconvertible currency.

It is necessary to state a few facts as they existed in December, 1925, in order to appreciate the situation at that time.

The Bank were a Portuguese Joint Stock Company which acted as bankers to the Portuguese Government, and which ever since 1887 had enjoyed an exclusive licence to issue their own notes as the only legal currency in Portugal. The capital of the Bank was 13,500,000 escudos in fully paid shares with limited liability. There were two species of issue and of notes in circulation - namely, one destined for the banking operations of the Bank, the other applied as loans to the Treasury. The limit of the right of issue for banking operations was between 195 and 196 million escudos; notes for this purpose had in fact been issued to an amount between 64 and 65 million escudos, leaving an unexhausted power of issue to an amount of about 131 million escudos. Notes issued on Government account amounted to 1640 million escudos, so that the total issue of authorized notes amounted in December, 1925, to a face value of 1704 million escudos or thereabouts. The loans to the Government bore interest only at 1 per cent. per annum, of which five-eighths fell to a sinking fund. None of the Bank's notes were payable or redeemable in gold or silver. A period of inconvertibility had been established in 1891 and was still continuing, with no likelihood of its ever being determined. The only liability of the Bank, so far as concerns paying or redeeming a note when presented at the Bank, was to give in exchange for it another note or notes of equivalent face value. Each note when issued by the Bank became in the hands of the holder legal tender, and any such note if paid to the Bank by a debtor to the Bank must be accepted by the Bank in discharge pro tanto of the debt.

That being the condition of affairs, when the Bank gave a good unissued note in exchange for a Marang note did they become poorer to the amount of 500 escudos either by parting with 500 escudos or by incurring an immediate liability to part with 500 escudos? That appears to me to be the crucial question; and the answer seems to me to depend upon a correct appreciation of what happened when the Bank issued the good note to the holder of a Marang note, and a correct statement of the obligations which the Bank assumed by the issue of that good note.

As already pointed out, Wright J. and Greer and Slesser L.JJ. were of opinion that the Bank in issuing the note were parting with 500 escudos. It is true that Wright J. also refers to the Bank assuming a liability in issuing the note, but I think he bases his judgment on the former view, for he expressly treats the case as if it were just the same as a case where a bank has been deprived of a note issued by some other authority.

In my opinion the Bank parted with no escudos. They issued something which in the hands of the recipient was currency of Portugal and legal tender for payment of indebtedness up to 500 escudos, the form of that currency being, not any metal or other substance of value, but a piece of paper by virtue of which an obligation was incurred by the Bank to the holder thereof. While that something was in the possession of the Bank it could have no value assigned to it, for an obligation by one to himself is nothing worth. The value attaches to the note when it is issued to the holder; but the value does not quit the Bank, and leave the Bank so much poorer. The value attaches to the note when the Bank issue it, and thereby undertake an obligation to the holder. The Bank are affected not by the parting with anything which they possessed but by the incurring of an obligation.

My Lords, that in my opinion is an accurate statement and a complete statement of what happened when the Bank issued a good note to the holder of a Marang note. If that be so then it must follow that the judgments below cannot stand, in so far as they are based upon the view that the Bank parted with or lost escudos to the amount of the face value of the good notes which were given in exchange for Marang notes. In truth this view was the outcome of the erroneous belief that there was no distinction to be drawn between a note of the Bank of Portugal in the possession of that Bank, and the same note in the possession of another bank or individual; a belief which in terms emerges in the judgments of Wright J. and Greer L.J. and which underlies the Bank's 16th reason.

This belief is clearly in founded. This was indeed admitted in your Lordships' House; and the Bank's argument proceeded upon the footing that by reason of the obligation incurred by the Bank in issuing a good note and of the fact that they had received nothing in return, they had necessarily suffered damage to the extent of the face value of the note. I say "necessarily," for the Bank made no attempt to prove this by evidence. It must, if the Bank are to succeed, be a case of the thing speaking for itself. I have to deal with this in some little detail, because it appears to me that with the disappearance of Reason 16, there disappeared also the Bank's only basis for claiming the face value of the notes, without giving affirmative evidence of the damage which they had sustained.

What then was the obligation which the Bank incurred?

Mr. Gavin Simonds, in the course of an admirable argument which leaves me much in his debt, defined this obligation with I think complete accuracy. It is threefold - namely:

 To give in exchange a note or notes of equivalent face value each carrying a similar obligation.
 If and when it is hereafter decreed that the notes are to be redeemed in gold, then on demand such quantity of gold as may be decreed.
 If and when it is hereafter decreed that some new form of currency shall be legal tender, and that the Bank's notes are to be paid in such currency, then on demand to pay the proper amount of such currency.

The problem then is to quantify those obligations in terms of money. What is the sum which will compensate the Bank for being forced to undertake those obligations? How much worse off is the Bank likely to be by having to fulfil them?

To say that by having to fulfil them the Bank will necessarily be worse off by the face value of each note given in exchange for a Marang note seems to me, with all respect to those who think otherwise, manifestly impossible. Such a conclusion should surely be based upon some evidence. Could any evidence hope to establish it? For myself I can see no such possibility. The first obligation carries no loss to the Bank except the cost of providing the new note. The second obligation is so far removed from actuality that both the Courts below treat it as a nominal matter. The third obligation is purely contingent and even hypothetical. But let me again remind the House that even if some appreciable degree of damage could arise to the Bank by the assumption of this threefold obligation, it was incumbent on the Bank to prove it. This task they never attempted.

It was, however, argued that damage had accrued to the Bank in other ways by reason of their having been forced to issue notes, getting nothing in return.

It was said that the Bank had assumed an obligation, getting nothing in return. That is true. It was then said that the value of that obligation was the value of the note in the market - namely, 500 escudos. The same argument assumed another form - namely, that the sum in sterling which the Bank claimed to recover from Messrs. Waterlow was the exact amount which it would have cost Messrs. Waterlow at the relevant date to purchase 209,718 notes in order that the Bank's liability thereon might be cancelled. When the value of the obligation is alleged to be value of the note, that can only mean that that is the value to the noteholder of the fulfilment by the Bank of their obligation. It by no means follows that 500 escudos represents the cost to the Bank of that fulfilment. But in assessing damages for a breach of contract the question is not what sum will it cost the defendant to repair his breach, but what loss has the plaintiff sustained by reason of the defendant's breach. In many cases, possibly in most cases, the answer to each question would be the same sum. It would be the same here if Reason No. 16 were true, and if the Bank had really parted with 500 escudos with each note issued in exchange for a Marang note.

Further, it was argued that in respect of each note so issued the Bank had lost the consideration which they would have received if they had issued the note for the purposes of their banking business. There is no ground for assuming that all or indeed any of the notes would have been issued for this purpose rather than for Government purposes. Assuming, however, this fact in the Bank's favour, this argument as it appears to me adds nothing. It only means that the Bank have assumed a liability without receiving any consideration. The true question still remains; what damage have they suffered by assuming the liability which each issue involves?

Another argument centred in the allegation that each note issued in exchange for a Marang note, being legal currency, could be applied by the holder and must be accepted by the Bank in payment of a debt due to the Bank, although at the time of its issue nothing had been received by the Bank. True; but this consideration will not per se justify the view that the Bank must necessarily be worse off by the face value of every note so issued; for who can say that all or any or how many notes so issued, will be so applied? The Bank are affected once and for all by the fact, and only by the fact, that at the moment of issue of the note in exchange for the Marang note they assumed the threefold obligation described above; and we come back always to the same question: What sum represents the damage suffered by the Bank in December, 1925, when they assumed that obligation?

Finally, it was urged that if and when the Bank went into liquidation, and the assets of the Bank were realized and applied in payment of their creditors, the increased liability assumed in December, 1925, would necessarily occasion a diminution of the surplus (if any) available for the shareholders. This indeed was the argument of Dr. Ulrich in the witness box. Few events are less likely to happen; but if this event ever did happen as described, and the creditors were paid in full, the shareholders would not necessarily suffer a loss. For according to one theory with the increase of the number of escudos in circulation there follows an automatic decrease in the value of escudos and an automatic increase in the value of assets measured in terms of escudos. But though this argument might be advanced in support of a claim to some damage beyond the cost of printing, it appears to me to be of no assistance towards establishing the Bank's proposition that the measure of their present damages must be the face value of the notes.

When all is said and done the position is this. The Bank make no claim based on curtailment of their powers of issue, or based on loss of profitable business. They make no claim for damages resulting from the introduction of 209,718 Marang notes into the existing currency of 1704 million escudos. They make one claim only - namely, that every time they issued a good note in exchange for a Marang note they suffered damage to the extent of 500 escudos. In support of that claim they offered no evidence; they pinned their faith to the proposition contained in the 16th Reason. When that is shown to be false, nothing remains to support their claim.

One of your Lordships in his speech has, in effect, accused those of us who differ from him in this case, of upsetting a number of authorities governing our commercial law. Personally, I am unconscious of any such assault upon authority. I am only conscious of deciding that the Bank have not proved that they have suffered the enormous damages which they claim to recover from Messrs. Waterlow. I confess, however, that I derive some consolation from the knowledge that, in this alleged act of violence I am abetted by one whose pre-eminence as a commercial lawyer is both well established and long established.

Upon this part of the case I am in agreement with the view expressed by Scrutton L.J. - namely, that the judgment of Wright J. should be set aside and judgment entered for the Bank for the sum of 8922l. I would accordingly allow the appeal of Messrs. Waterlow and dismiss the Bank's appeal.

A majority of your Lordships, however, think otherwise, and are of opinion that the Bank have proved that in issuing a good note in exchange for a Marang note they suffered immediate damage to the amount of 500 escudos. Messrs. Waterlow upon that footing are prima facie liable to the Bank in the sum of 104,859,000 escudos or (converted into sterling at the appropriate rate and date) 1,092,281l. This indeed would appear to be something in the nature of a windfall for the Bank; for the introduction into a total issue of 1704 million escudos of less than 105 million bastard escudos will have resulted in the Bank recovering a sum amounting to more than seven times their paid up share capital.

There remains the question whether in the circumstances of this case a date can be fixed by reference to which the Bank were not entitled to charge Messrs. Waterlow with the damage sustained by reason of the exchange of good notes for Marang notes subsequently thereto.

Wright J. fixed such a date as December 16, 1925. Greer and Slesser L.JJ. fixed it as December 10, 1925. Scrutton L.J. fixed it as December 26, 1925, being the date which by the Bank's public notice, issued in concert with the Government, was fixed as the last day on which Vasco da Gama 500 escudos notes would be exchanged.

Upon this part of the case I do not intend to trouble the House. At this point my dissent comes to an end, and we all find ourselves in agreement with Scrutton L.J.

The circumstances of this case are very exceptional. The forged notes only fail to be real because their printing was unauthorized. They were printed from the Bank's own plates. Long before there was any possibility of detection they had been circulating in large quantities. Numbers of them may have obtained the status of validity by having been received and reissued by the Bank and its numerous branches. There was no possibility of ascertaining which Marang notes had in this way acquired enforceable rights. This feature of reissue strikes me as being of overriding importance.

In these circumstances I am of opinion that it cannot be effectively contended either that the Bank should not (down to and including December 26, 1925) have honoured all Marang notes, or that such damages as flowed from that course of action are not damages which fall within the test of Hadley v. Baxendale, F10 and for which Messrs. Waterlow are liable.

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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