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Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd And Others

Judgment Cited authorities 9 Cited in Precedent Map Related
Vincent
Judgment Date12 July 1983
Year1983
Judgement NumberHCA1488/1978
Subject MatterCivil Action
CourtHigh Court (Hong Kong)
HCA001488C/1978 TAI HING COTTON MILL LTD v. LIU CHONG HING BANK LTD AND OTHERS

HCA001488C/1978

Action No. 1488 of 1978

Banking - Forged cheques - Wrongful debiting of a customer's current account - Whether the customer is vicariously liable to the bank for the forgeries of its servant - Whether the customer owed the bank a duty of care - Whether the banks' rules were contractual - Construction of the banks' rules - Account stated - Conclusive evidence clause - Verification agreement-Estoppel Evidence - Standard of proof in civil proceedings when allegations of criminal conduct are made.

A textile mill employed a dishonest accounts clerk who stole HK$ 7,000,000 from its bank accounts over a period of 5 years by obtaining the Managing Director's signatures to cheques by deception and by forging the Managing Director's signature. The mill's internal accounting system was inadequate to prevent or discover the frauds, chiefly because the task of reconciling the monthly bank statements was left to the dishonest clerk and there was no independent check of the reconciliations until at the end in May 1978 the frauds were revealed. At no time ever the 5-year period did the mill ever protest or question any of the monthly bank statements and in the case of one of its bank accounts sent regular confirmations of the monthly statements. In an action by the mill against the clerk for damages and against the three paying banks for declarations that they were not entitled to debit its accounts with them with the amounts of the forged cheques, it was held that:-

1. Proof of criminal conduct in civil proceedings need not be to the standard necessary in criminal proceedings. The civil standard of proof as defined in Reg. v. Home Secretary Ex-parte khawaja [1983] 2 W.L.R. 321 is sufficient. Applying that standard, the plaintiff had proved that all except one of the themes alleged but not admitted to be forged were forged

2. Prima facie, the defendant banks were not entitled to debit the plaintiff's current accounts with the amounts of the forged cheques

3. The plaintiff was not vicariously liable to the defendant banks for the fraud or its servant, the 4th defendant.

4. The plaintiff owed the defendant banks no duty either in contract or in tort

(a) to take reasonable care to prevent cheques drawn on its account but not representing its orders being presented for payment, or

(b) to take reasonable care to check its monthly bank statements and to notify the banks of any unauthorized debits.

5. On the facts, the plaintiff would have been in breach of both duties had they been found to exist.

6. The defendant banks' rules did impose contractual obligations upon the parties insofar as they are capable of being given contractual effect.

7. In no case, on the true construction of the defendant banks' rules, did the monthly bank statements become conclusive of the account between the parties in the event of their being confirmed or not objected to.

8. The plaintiff was not estopped from contesting the authority of the defendant banks to debit its accounts by reason of any breach of duty but was estopped by reason of representations made to the banks that the monthly bank statement did not contain unauthorized debits and/or that the bank could assume that they did not contain any unauthorized debits.

9. The estoppel did not operate in the case of the 1st defendant in relation to any forged cheques which passed through its account prior to the plaintiff's failure to object to the first monthly bank statement containing unauthorized debits.

10. The plaintiff was entitled to a declaration in the terms sought against the 1st defendant in relation to unauthorized debits in the monthly bank statement received in January 1978 and to judgment against the 4th defendant in a sum equal to the total amount obtained from the bank accounts save for those sums covered by the declaration. The 2nd and 3rd defendants were entitled to judgment on the claim.

IN THE HIGH COURT OF JUSTICE

Action No. 1488 of 1978

BETWEEN

TAI HING COTTON MILL LIMITED Plaintiff

AND
LIU CHONG HING BANK LIMITED 1st Defendant
THE BANK OF TOKYO LIMITED 2nd Defendant
CHEKIANG FIRST BANK LIMITED 3rd Defendant
LEUNG WING LING 4th Defendant
WANCE CHENG 5th Defendant

_______

Coram: Hon. Mantell, J.

Date: 12 July 1983

__________

JUDGMENT

__________

1. The plaintiff is a textile manufacturer. The first three defendants are banks. The 4th defendant was employed by the plaintiff as an accounts clerk, and the 5th defendant is the 4th defendant's wife. It is alleged that the 4th defendant stole large sums of money from the plaintiff's bank accounts with the Dah Sing Bank and with each of the first three defendants by fraud or forgery and that the 5th defendants has received some of the proceeds. The plaintiff's claim against the 5th defendant has been compromised. The claim against the 4th defendant is for damages for fraud and conversion. The claims against the 1st, 2nd and 3rd defendants are for declarations that they are not entitled to debit the plaintiff's accounts with the amcounts of the forged cheques.

2. Since there are allegations of criminal conduct Mr. Diamond submits that the plaintiff must prove them to the same standard as would be necessary in a criminal court. He relies upon a decision of the Privy Council, (1) not on appeal from Hong Kong, which is certainly authority for the proposition and which was recently followed by the High Court in Hong Kong, (2) but in the latter case the learned judge was not referred to the decision in Reg. v. Home Secretary Ex-parte Khawaja.(3) In khawaja, the House of Lords approved the approach of the English Court of Appeal in Hornal, v. Newberger Products limited (4) and Bater v. Bater (5) which favoured a flexible application of the civil standard. Lord Scarman said :

''I have come to the conclusion that the choice between the two standards is not one of any great moment. It is largely a matter of words. There is no need to import into this branch of the civil law the formula used for the guidance of juries in criminal cases. The civil standard as interpreted and applied by the civil courts will meet the ends of justice".

He quoted the words of Morris L.J. in Hornal's case.

"No real mischief results from an acceptance of the fact that there is some difference of approach in civil actions......the very elements of gravity become a part of the whole range of circumstances which have to be weighed in the scale when deciding as to the balance of probabilities."

I have sought to apply the civil standard as defined in khawaja's case bearing in mind at all times the aphorism of Lord Denning in Blyth v. Blyth. (6)

"In proportion as the offence is grave, so ought the proof to be clear."

Applying that standard I find as follows.

3. The plaintiff is a medium sized, reasonably successful textile company which has been in business in Hong Kong since 1957. It comprises a number of divisions each of which is autonomous to a degree. The Managing Director is Mr. Chen. He started the company in Hong Kong and before 1957, controlled a similar business in Shanghai. At different times, the plaintiff has held a number of bank accounts. In November 1962, the plaintiff opened a bank account with the 1st defendant. That account was allocated to the Spinning and Weaving Division. The request to open a current account is dated 8th November 1962 and was signed by Mr. Chen. The request begins with these words:

"We request you to open a current account for and in the name of Tai Hing Cotton Mill Limited, a company incorporated in Hong Kong, having its registered office at 908/909 Yu To Sang Building, Hong Kong, subject to your Rules and Regulations for the conduct of such account."

4. Mr. Chen admits having seen a copy of the Rules and Regulations at the time of making the request to open a current account. Some alterations were made later but rule 13 of the rules seen by Mr. Chen reads:

"A statement of the customer's account will be rendered once a month. Customers are desires:

(1) to examine all entries in the statement of account and to report at once to the Bank any error found therein,

(2) to return the confirmation slip duly signed. In the absence of any objection to the statement within seven days after its receipt by the customer, the account shall be deemed to have been confirmed."

No confirmation of any material bank statement was ever sent by the plaintiff to the 1st defendant. The 1st defendant was authorised to pay cheques drawn on behalf of the company if singed by Mr. Chen or by any two of four nominated signatories. An account was opened with the 2nd defendant in November 1961. By letter of 17th November 1961, Mr. Chen agreed on behalf of the plaintiff to observe the provisions of an agreement which is to be found on the reverse of the proforma letter and to conform to the bank's notice in the cheque book. By that letter Mr. Chen further undertook to hold the bank free from any loss resulting from the plaintiff's failure to abide by such provisions or notice. Clause 10 of the "agreement" provides:

"The Bank's statement of my/our current account will be confirmed by me/us without delay. In the case of absence of such confirmation within a fortnight, the Bank may take the said statement as approved by me/us."

Again no material bank statement ever was confirmed. Again cheques could be signed by Mr. Chen alone or by two authorised signatories. The plaintiff's...

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