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Banco de Portugal v. Waterlow and Sons Ltd

[1932] A.C. 452

(Judgment by: Lord MacMillan)

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 MacMillan

My Lords, there is already on record in the admirable judgment of Wright J. an adequate account of the fraud perpetrated by Marang and his fellow conspirators on Messrs. Waterlow & Sons and the Bank of Portugal. It is therefore unnecessary to detain your Lordships by recounting afresh the dramatic circumstances of a crime for which in the ingenuity and audacity of its conception and execution it would be difficult to find a parallel. The present appeals are concerned with the civil consequences of that crime, and in particular with the estimation and attribution of the loss which it has occasioned.

As regards Messrs. Waterlow & Sons, the result of the fraud practised upon them was to cause them, without the authority of the Bank, to print 580,000 Bank of Portugal notes of 500 escudos each of the Vasco da Gama type from the plates which were in their possession as the Bank's printers and to place these unauthorized notes at the disposal of the conspirators. As regards the Bank, the result of the fraud was the debasing of the currency of Portugal, for the validity of which the Bank as the central bank of issue of the country was responsible, by the introduction into it by the conspirators of a large number of these spurious notes.

It was conceded by Messrs. Waterlow that it was an implied term of the contractual relationship subsisting between the Bank and themselves that they should not print notes from the plates in their possession except on the direct orders of the Bank. As they in fact printed and delivered 580,000 notes to the conspirators without any order from the Bank, there can be no question, and it was indeed frankly admitted by Messrs. Waterlow, that their action in so doing constituted a breach of their duty to the Bank. For any loss attributable in law to this breach of duty which the Bank can prove that it has suffered Messrs. Waterlow admit liability. The debate at your Lordships' bar consequently centred round the problem: What loss for which Messrs. Waterlow are legally responsible has the Bank of Portugal sustained by reason of the unauthorized printing and introduction into the currency of Portugal of the spurious notes in question?

Now it was admitted that the Bank on discovering that a large number of spurious notes had been surreptitiously introduced into the currency of Portugal was not only entitled but bound in its own and the public interest to adopt remedial measures for the protection of the currency. The step which it took was to publish at once a notice intimating that it had resolved to withdraw from circulation the entire vitiated issue of 500 escudo Vasco da Gama notes in the hands of the public and on their presentation at the head office or branches of the Bank to give other notes in exchange for them. In pursuance of this notification the Bank honoured all the 500 escudo Vasco da Gama notes which were presented to it for exchange, spurious and genuine alike.

That the withdrawal of the whole issue was a reasonable and indeed the only practicable step for the Bank to take in order to remedy the situation which had arisen was hardly contested by Messrs. Waterlow They directed their criticism rather to the way in which the Bank carried out its policy. In the first place they argued that the Bank acted precipitately, and that if it had delayed the announcement of the withdrawal of the notes for a short time the means of discriminating between the spurious and the genuine notes, which admittedly the Bank did not at first possess, would have been available to it and it could have refused to honour the notes ascertained to be spurious.

In the next place they argued that if the Bank had at first no alternative but to honour spurious and genuine notes alike by reason of its inability to distinguish between them it should have ceased to honour the spurious notes whenever it had acquired or could have acquired the means of discrimination. Neither of these criticisms of the Bank's action is in my opinion warranted. The Bank in my view was justified in taking immediate action when it did, for the fact of the existence in the currency of a large number of spurious notes became a matter of public knowledge almost simultaneously with its discovery by the Bank, and if a panic was to be averted it was essential to take action at once. I equally think that having properly announced the withdrawal of the notes and its intention to honour all such notes in the hands of the public, it was not possible for the Bank to alter its policy until a reasonable time had been given to the public to effect the exchange.

To have honoured the spurious notes so long as it could not tell them from the genuine notes and then to cease to honour them when it acquired the means of discrimination would have created a second panic, and such a course of conduct on the part of the Bank would have been grossly unfair. If the only way to avoid a panic was to honour good and bad notes alike, as I think in the circumstances it was, the Bank's ability to distinguish between them becomes an irrelevant consideration. Moreover the Bank was quite unable to say with regard to any particular spurious note presented to it whether it had not itself unwittingly reissued it into circulation and so become responsible for it.

I confess I am not disposed to regard with much sympathy the criticism which Messrs. Waterlow have directed at the Bank's action. Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency.

The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken. On this part of the case I find myself in agreement with the reasoning of Scrutton L.J. In my opinion the action of the Bank in honouring all notes of the type in question, genuine and spurious alike, between December 7 and December 26, 1925, was reasonable and justifiable in the circumstances, and Messrs. Waterlow ought to be held responsible for whatever loss was occasioned to the Bank by the adoption of that policy. I have taken December 26 as the limiting date, for that was the date which the Bank itself fixed, and I think that it was proper to specify a time-limit for the presentation and exchange of the notes. In so far as the Bank voluntarily continued to honour notes presented after December 26 I am of opinion that it should not be allowed to lay the cost of doing so to the charge of Messrs. Waterlow.

The problem thus now narrows itself to the ascertainment of the loss which the Bank incurred by reason of its having honoured spurious 500 escudo notes of the Vasco da Gama type between December 7 and December 26, 1925.

In all 799,190 of the notes, including both the genuine and the spurious ones, were withdrawn from circulation. This figure includes those withdrawn after December 26. Of the 799,190 notes it has been ascertained that 209,718 or 26.241 per cent. were spurious. Up to December 26, the total number withdrawn was 791,533. If the percentage of 26.241 be applied to this figure the result is that between December 7 and December 26 207,706 may be taken as the number of spurious notes which the Bank honoured between these dates. Consequently the loss which the Bank is entitled to attribute to Messrs. Waterlow's breach of contract is the loss which it incurred by issuing good notes in exchange for 207,706 spurious notes. That is the measure in law of the liability of Messrs. Waterlow to the Bank.

The problem of assessing this loss necessitates an excursion into the controversial region of banking finance. What the Bank actually did was to give good and valid notes in exchange for entirely worthless notes. What loss did this occasion to the Bank? On the one hand it is submitted that all that the Bank lost was the negligible cost in paper and printing of the good notes which it gave in exchange for the spurious notes. On the other hand it is submitted that the Bank lost the full face value of these good notes so given in exchange.

Your Lordships were presented with a choice between these two extremes. No possible middle course was suggested. Which is right? If neither were held to be right the action would have to be dismissed, for neither evidence nor argument was adduced in support of any alternative other than the two I have stated.

The argument which was presented with admirable lucidity and much cogency by Mr. Gavin Simonds on behalf of Messrs. Waterlow and which prevailed with Scrutton L.J. in the Court of Appeal and has also prevailed with two of your Lordships, is certainly attractive. The Bank of Portugal, so runs the argument, is a bank of issue, that is to say, it can create and issue notes at its discretion up to the maximum which the law of Portugal, embodied in appropriate ordinances. permits. It costs the Bank nothing to create and issue its notes beyond the cost of the paper and printing. True, when the Bank issues one of its notes it incurs an obligation to the holder of it. But inasmuch as the paper currency of Portugal is not convertible, or, in other words, does not entitle the holder to claim payment of its face value from the Bank in gold at a fixed rate, the only obligation which the Bank incurs when it issues a note is to give on demand another note in exchange for it. Thus the Bank can always honour its obligation to the holders of its notes at the trivial cost of printing new notes. A promissory note which is perpetually renewable has theoretically no value, because it is never payable. The Bank has consequently only sacrificed some stationery.

In my opinion this argument is fallacious. It overlooks the cardinal fact that a note when issued by the Bank of Portugal becomes by the mere fact of its issue legal tender for the sum which it bears on its face. The issued note represents so much purchasing power in terms of commodities. It can be used by the holder of it to purchase at current prices any commodity in the market, including gold and securities. It can equally be used by the Bank to purchase commodities, including gold and securities, or to discharge debts due by it. It must be accepted by the Bank in discharge of debts due to it.

All this is quite irrespective of the convertibility of the note. With all respect to the contrary view it is in my opinion quite an irrelevant circumstance for the present purpose that the holder of a Bank of Portugal note is not entitled to demand for it from the Bank a fixed amount of gold. Gold after all is only a medium of exchange. Its special importance as such arises from its universal acceptability and the stability of its value. A bank of issue which undertakes to pay its notes in gold undertakes to give in exchange for them a commodity of universally recognized value, and therefore a paper currency backed by gold possesses a high value in exchange; it is in effect as good as gold. On the other hand a paper currency which the bank issuing it does not undertake to pay in gold has necessarily a lower value in exchange; its purchasing power is not measurable in terms of a universally accepted standard, but depends on the credit of the issuing bank. In the present case the low value in exchange of the 500 escudo note of the Bank of Portugal reflects its inconvertibility; its purchasing power is correspondingly diminished. The Bank gets less value for the notes which it issues than it would get if they were convertible in gold.

In the course of the debate Mr. Simonds in answer to a question from me admitted that if the notes of the Bank had been payable in gold the liability of his clients would have been measurable in terms of their face value. This admission in my view was really inconsistent with his argument, which, whether it be well founded or not, seems to me to be unaffected by the convertibility or inconvertibility of the notes. Whether its notes are convertible or not a bank of issue in issuing them incurs only the cost of paper and printing; the difference consists in the purchasing power which they represent according as they are the equivalent of so much gold, i.e., of a universally acceptable medium of exchange, or only of so much of the bank's credit, a particular medium of exchange whose value may vary between being as good as gold or as worthless as dross. If the notes of the Bank of Portugal had been convertible the liability of Messrs. Waterlow would have been for the value of convertible notes, i.e., for notes of a higher exchange value, instead of for the value of inconvertible notes, i.e., for notes of a lower exchange value.

Much stress was laid by Messrs. Waterlow on the fact that in the Bank's own hands its notes were mere chattels possessing only the value of the paper and printing, and that if by a fire in its premises its whole stock of notes were burnt it would lose no more than their chattel value, whereas if the Bank's notes were destroyed by fire while in the possession of a member of the public a loss represented by their face value would be incurred. That is true, but the argument disregards again the value of the note-issuing power of the Bank, which enables it to confer on the paper which it issues the quality of legal tender, the quality of possessing purchasing power to the amount indicated on its face.

The Bank only issues notes in exchange for value, and the value of its notes in turn reflects the value which it receives in exchange for them. Herein lies the answer to the point advanced on behalf of Messrs. Waterlow that, inasmuch as the Bank issues the bulk of its notes on the call of the Government on unremunerative terms, it cannot be said that the Bank if it had itself issued the spurious notes would necessarily have received full value for them; they might have been included in an unremunerative issue to the Government. The answer, it seems to me, is that the circumstance that a large number of its notes are issued to the Government in exchange for Government paper on unremunerative terms has for its result that the assets on which the paper currency of Portugal is based are by so much the less valuable as a basis of credit and that the currency has a correspondingly less value in exchange. Messrs. Waterlow get the benefit in the depreciated value of the escudos they have to pay.

It remains to notice an ingenious argument that the only effect of the increase in the currency of Portugal by the introduction of the spurious notes was to diminish the value of each unit of the currency and so to increase correspondingly the value in terms of that currency of all the assets in the country. Thus any loss occasioned to the Bank by the introduction of the spurious notes would be compensated by an equivalent appreciation of its assets. This is said to be the result of what is known as the quantity theory of money. I am not concerned to discuss the validity of this theory. I should doubt if it is applicable in the case of a surreptitious dose of excess notes and where, as here, the excess notes as soon as their existence was known were at once withdrawn; but in any case it is sufficient for the present purpose to point out that there is no evidence of any depreciation of the currency having occurred in consequence of the introduction of the spurious notes, and no evidence of the Bank having been compensated for issuing gratuitously over two hundred thousand of its notes by an equivalent appreciation of its assets. This argument, it may be remarked, would appear to be equally applicable in the case of a convertible currency.

On the whole matter accordingly I reach the conclusion that the Bank, being compelled to issue for nothing notes for which if it had issued them in ordinary course it would have received value corresponding to the purchasing power of the number of escudos which they represented, has suffered loss to the extent of the face value of these notes.

I now proceed to work out the practical result. The spurious notes honoured by the Bank between December 7 and 26 amounted to 207,706, which at 500 escudos each gives a total of 103,853,000 escudos, equivalent, at 96 escudos to the pound sterling, being the agreed current rate of exchange at the time, to 1,081,802l. To this must be added 6541l., being the cost of the genuine notes rendered useless by their withdrawal from circulation, bringing out the total liability of Messrs. Waterlow at 1,088,343l. The Bank agreed that a claim of 2381l. which it had originally made for the cost of the good notes given in exchange for the spurious ones and which Wright J. took into account could not receive effect if the Bank was awarded the value of the spurious notes. For the sum of 1,088,343l. the Bank would accordingly be entitled to judgment were it not for the fact that it has already received from the liquidators of the Banco Angola e Metropole, the organization set up by the conspirators for the purpose of utilizing the spurious notes, a sum equivalent to 413,430l., and have also estimated that they will receive from this source a further sum of 75,000l., making in all 488,430l.

A question has been raised as to the manner in which credit should be given for this sum. There are various ways in which it may be treated.

 It may simply be deducted from the sum of 1,088,343l. for which Messrs. Waterlow are liable, leaving 599,913l. as the sum for which judgment should be pronounced;
 inasmuch as the Bank's total loss (apart from the cost of printing notes) amounted to 1,092,281l., being the sterling equivalent of 209,718 spurious notes, and as the 488,430l. represents a partial recovery against this sum, a proportion of the 488,430l. in the ratio of 207,706 (being the number of spurious notes in respect of which Messrs. Waterlow have been found liable) to 209,718 (being the total number of spurious notes honoured), or in other words 99.04 of the 488,430l. or 483,741l. should be deducted from the sum of 1,088,343l., leaving 604,602l. as the sum for which judgment should be pronounced; or
 the sum of 488,430l. should be deducted from the Bank's total loss of 1,098,822l. (being the loss on 209,718 spurious notes plus the cost of genuine notes rendered useless) leaving 610,392l., and as this sum is well within the total sum of 1,088,343l. for which Messrs. Waterlow are liable, judgment should be pronounced for 610,392l.

Messrs. Waterlow contend for the first method, Wright J. adopted the second, and the Bank contend for the third, quoting in support The Morgengry and The Blackcock. F11 The differences in result are relatively unimportant in view of the magnitude of the sums involved and I have found the question a troublesome one, but I have come to the conclusion that the third method is the right one.

Having recovered part of their total loss from the perpetrators of the fraud, and having established liability for more than the balance of their total loss against Messrs. Waterlow, the Bank is, in my view, entitled to avail themselves of Messrs. Waterlow's liability up to the extent of the balance of their total loss, and so to secure from the combined sources complete indemnity.

In parting from the case I cannot refrain from observing that the fact that a sum of nearly half a million pounds has been recovered by the Bank from the conspirators gives occasion for a comment on the leading contention of Messrs. Waterlow that the Bank lost nothing by issuing its good notes in exchange for spurious ones. The conspirators constituted themselves an illegal bank of issue for the spurious notes which cost them nothing but the cost of paper and printing, yet they seem to have made half a million sterling and probably much more by the issue of these notes. Why, it occurs to me to ask, should it be said that the Bank would not equally have received value in return if it had issued a corresponding number of genuine notes in ordinary course and that it has been deprived of nothing by having had to issue them gratuitously?

I am accordingly in favour of dismissing Messrs. Waterlow's appeal, allowing the Bank's appeal, and directing judgment to be pronounced against Messrs. Waterlow for the sum of 610,392l.

Order of the Court of Appeal reversed and judgment of Wright J. varied by increasing the sum of five hundred and sixty-nine thousand, four hundred and twenty-one pounds (569,421l.) to six hundred and ten thousand, three hundred and ninety-two pounds (610,392l.), and subject to such variation restored. Appeal of Waterlow & Sons, Ld., dismissed. Waterlow & Sons, Ld., to pay to Banco de Portugal the costs in the Court of Appeal and also the costs of the appeals to this House. Banco de Portugal to pay to Waterlow & Sons, Ld., the costs of the petition for leave to adduce further evidence, such costs to be set off against the costs ordered to be paid by Waterlow and Sons, Ld., to Banco de Portugal. Cause remitted back to the King's Bench Division to do therein as shall be just and consistent with this judgment.

Lords' Journals, April 28, 1932.

 Solicitors for Banco de Portugal: Travers-Smith, Braithwaite & Co.
 Solicitors for Waterlow & Sons, Ld.: Johnson, Jecks & Colclough.

(1854) 9 Ex. 341.

(1880) 5 App. Cas. 25, 39.

[1929] 1 K.B. 400 .

[1900] P. 1 .

9 Ex. 341, 354.

5 App. Cas. 25, 39.

9 Ex. 341, 354.

9 Ex. 341.

[1900] P. 1 .

9 Ex. 341.

[1900] P. 1 .

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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