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Banco de Portugal v. Waterlow and Sons Ltd

[1932] A.C. 452

(Judgment by: Lord Warrington of Clyffe)

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 Warrington of Clyffe

My Lords, these are two appeals from an order of the Court of Appeal dated March 26, 1931, varying the order and judgment of Wright J. dated January 12, 1931, whereby he directed that judgment be entered for the Bank for 569,421l. with costs. The Court of Appeal by a majority (Greer and Slesser L.JJ.) reduced the damages to 300,000l., and unanimously dismissed a cross-appeal by the Bank that this sum should be increased to 611,851l. Scrutton L.J. was of opinion that no larger sum than 8922l. was recoverable by the Bank. The Bank by their appeal seek to have the damages increased to 610,392l. or alternatively to 567,040l. Messrs. Waterlow on the other hand seek to have the damages reduced in accordance with the opinion of Scrutton L.J.

It is now admitted by Messrs. Waterlow that they are liable to the Bank in damages for breach of contract, and the only question before this House is as to the damages to be awarded.

I do not propose to restate in detail the facts already related in the opinion of the Lord Chancellor, but only to give a summary sufficient to render my conclusions intelligible.

The Bank is incorporated under the laws of Portugal and holds from the Government an exclusive licence for the issue of bank notes as legal tender in Portugal and the adjacent Islands, but this does not extend to the Portuguese Colonies. At all material dates the currency of Portugal was composed solely of notes issued by the Bank. They act as bankers to the Government and carry on a general banking business with a head office at Lisbon and a branch in Oporto and numerous agencies in other places. At all material dates the notes of the Bank were and they still are inconvertible, that is to say they are not payable in gold, but only in the currency of the State.

The unit of currency is the escudo, nearly equivalent at par to the American dollar and denoted by the same symbol - namely, $. The notes to which the present litigation relates are those of 500$. It is agreed that for the purpose of assessing damages the equivalent in sterling of 500$ would be 5l.

The contract, the breach of which has occasioned the litigation, was made between the Bank of the one part and Messrs. Waterlow of the other part, and was dated November 27, 1922. Under it and a repeat order dated February 20, 1924, Messrs. Waterlow printed and delivered to the Bank 600,000 notes for 500$ each. They are known as notes of the Vasco da Gama type, bearing as they do a portrait of Vasco da Gama on the face. These 600,000 notes as delivered were put into circulation by the Bank in 1923 and 1924.

In 1925 the Bank and Messrs. Waterlow were made the victims of an elaborate fraud on the part of one Marang and his associates, and Messrs. Waterlow were induced, in the belief that they were acting with the approval of the Bank, to print and deliver to Marang 580,000 Vasco da Gama notes. These notes were exact duplicates of the genuine notes printed under the contract, being printed from the same plates or from plates made from the same die. These notes were delivered to Marang as to 200,000 in February and March and as to 380,000 in August and September, 1925, and large numbers were put into circulation by means of a bank known as the Banco Angola e Metropole, formed by the conspirators for that purpose.

It is now common ground that in printing and delivering to Marang the 580,000 notes Messrs. Waterlow committed a breach of their contract for which they are liable to the Bank in damages.

There is no doubt as to the law applicable in such cases. It is sufficient to quote the well known rules laid down in Hadley v. Baxendale F7 in the judgment of Alderson B.:

"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 either be 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 breach of it."

Moreover, it is well settled that a voluntary act on the part of the injured party does not necessarily break the chain of causation between the wrong which occasioned the voluntary act and the damages. If the voluntary act is one which would be reasonably expected in the ordinary consequence of a breach of contract it is not a sufficient answer to say that the damage would not have happened but for the plaintiff's voluntary act.

In the present case the introduction by reason of Messrs. Waterlow's breach of contract into the currency of Portugal of a large number of spurious notes indistinguishable from the genuine notes would, if some drastic step had not been at once taken by the Bank, have had an incalculable and disastrous effect on the economic position in Portugal as well as on the reputation and credit of the Bank, as the body responsible for the issue of currency. As a consequence of the discovery, the result of investigations made at Oporto on December 4 and 5, 1925, of the fact that a number of the spurious notes were in circulation, the Bank on the Sunday, December 6, determined immediately to withdraw from circulation the whole of the Vasco da Gama notes of 500$ and to have notices published in the papers of Lisbon and Oporto advising the public that the cashing of the said notes would be effected at once at the chief office of the Bank and at all its branches. Such notices were duly published on the morning of December 7, and from that date onwards until the process was stopped as hereinafter mentioned all notes of the type in question whether genuine or spurious presented at the head office of the Bank or at any branch or agency were exchanged for currency of another type.

It is for the loss occasioned to the Bank by the exchange of genuine currency that the damages in this action are claimed.

On this claim the following questions arise:-

 Was the loss occasioned to the Bank such a loss as in accordance with the rules above referred to could be recovered in damages for breach of the contract?
 If so, what is the measure of such damages?
 Was there any and what date as from which by reason of matters coming to the knowledge of the Bank subsequently to December 7 they ought as between themselves and Messrs. Waterlow to have ceased to exchange spurious notes for genuine currency and thus have minimized the loss?
 In what way and to what extent ought moneys recovered from the perpetrators of the fraud to be credited to Messrs. Waterlow in reduction of damages?

The first question has been answered in the affirmative by all the judges in the Courts below, and I agree with their decision. It is in my opinion impossible to say that, having regard to the position at the time, and the possible consequences both to Portugal and to the Bank itself of the circulation of the spurious notes, the action taken by the Bank in exchanging all the notes of the type in question whether genuine or spurious for other genuine currency was not a reasonable step to take, and one which might be expected to be taken as a consequence of such a breach of contract as that in the present case.

As to the proper measure of damages there has been a difference of opinion in the Courts below. The majority (Greer and Slesser L.JJ.) in the Court of Appeal and Wright J. in the Court of first instance were of opinion that the proper measure of damages was the face value expressed in sterling of the genuine currency given in exchange for the spurious notes - namely, in the present case 5l. per note of 500 escudos, together with the cost of printing the genuine notes so given in exchange. Scrutton L.J. on the other hand was of opinion that the loss was confined to the cost of printing the new notes.

This is a difficult and in this case a very important question, seeing that in one view Messrs. Waterlow would be liable for a very large sum of money, and in the other for nothing beyond the 10,000l. paid into Court with their amended defence.

There are no principles applicable except such as are expressed in Hadley v. Baxendale, F8 nor are there any authorities which are of help. The damages are, however, damages for breach of contract, and in such cases it has to be remembered that they are exclusively measured by a loss actually incurred by the Bank and capable of being quantified in terms of money.

In reaching a conclusion it is essential to bear in mind that the sole measure of damages on which the Bank insisted at the trial, and still insists, is the face value, translated into sterling at the rate of 5l. for every sum of 500$ issued by them in exchange for a spurious note. They have maintained throughout that in issuing genuine currency in exchange for spurious notes they must be treated as having expended so much cash without receiving any consideration in return, and therefore to be the poorer by the amount so expended. This is made quite clear by Reasons 16 and 17 in their case. They made no attempt to prove that (except the expense of obtaining the paper and printing the notes) they incurred any other loss or damage, directly or indirectly, as, for example, by the increase in the currency and the consequent depreciation of its purchasing power, or by injury to their credit or interference in their relations with the Government or otherwise. All these considerations may be set aside, and accordingly, in explaining the views I entertain, by "damages" I mean only such damages as are claimed by the Bank. There may be loss or damage of another kind, but this is not in question.

The whole question in my opinion turns on the nature of the obligation incurred by the issuing Bank under the notes it issues. They are in effect promissory notes payable to bearer on demand. So long as they remain in the possession of the Bank they are merely pieces of paper, and if, for example, they were lost or destroyed while in their possession they could be replaced by printing other notes at the cost of the paper and the printing.

As soon as a note is issued it imposes an obligation on the Bank to pay to the bearer on demand 500$. This last is the only material obligation in the present case. There may be two others - namely,

 to pay in gold should the notes hereafter cease to be inconvertible, and
 to pay in some new form of currency should any such new form be introduced, but these possible obligations are contingent only and are of no importance in the present case.

It is proved by the evidence of witnesses called on behalf of the Bank itself that the only material obligation is satisfied by exchanging the note in question for another note of like denomination. If a judgment were recovered against the Bank it would be satisfied by delivery of currency for the amount.

Where, therefore, the Bank elects, as it has done in the present case, to treat the spurious notes as on the same footing as genuine notes, all it does is to accept an obligation to pay the holders in currency, that is to say, in notes. To do so, all it has to do is to take so many pieces of printed paper from its existing stock or to have further notes created should the existing stock be insufficient. In either case, the loss to the Bank is, in my opinion, confined to the expense of procuring the necessary paper and of printing the necessary number of notes.

Wright J., at p. 93 D of the Appendix, says:


that is to say, the Bank,

"are 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."

With all respect, I cannot accept the conclusion of the learned judge. It seems to me that by treating the Bank on the same footing as "any other institution" he ignores the vital distinction - namely, that the obligation incurred by the Bank is merely to pay in other currency which it has power to create for the purpose, whereas the institution not a bank of issue would have to procure the necessary currency by expenditure of money or sale of goods or in some similar way, or pay it out of currency already in hand. In fact, the sixteenth reason breaks down on examination, and its corollary the seventeenth falls with it.

The next question - namely, at what point of time did the exchange of genuine currency for spurious notes cease to be a natural result of the breach of contract, in the view I take as to the measure of damages, does not arise for decision; but if it did, I should agree with the opinion expressed by Scrutton L.J. at p. 131 of the Appendix, B. to F. He says:

"As he (Wright J.) 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"

(namely, in arriving at the conclusion that they should have ceased on December 16 to pay all the spurious notes without distinction)

"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 (the unauthorized currency) was indistinguishable to innocent holders from genuine currency, and I cannot think the Bank was bound to sacrifice innocent holders and the reputation of the national currency to protect the printers, the wrongdoers."

I think the right, as against Messrs. Waterlow, continued until December 26.

Under the circumstances no question arises as to the sum recovered from other persons.

The result is in my opinion that the appeal of the Bank should be dismissed with costs, and that of Messrs. Waterlow should be allowed with costs.

I need hardly say that it is with great regret, after anxious consideration, I have arrived at the conclusion that I must differ from opinions for which I have the greatest possible respect, but it is some consolation that I do so in good company. I should also like to say that I have been much assisted by the very clear and forcible argument of Mr. Gavin Simonds in reply.

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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