Your World of Legal Intelligence
 Hong Kong | 1-800-335-6202

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

Judgment Cited authorities 17 Cited in Precedent Map Related
Vincent
Judgment Date27 January 1984
Year1984
Judgement NumberCACV103/1983
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV103/1983 TAI HING COTTON MILL LTD v. LIU CHONG HING BANK LTD AND OTHERS

Headnote

A person who maintains a current account with a bank is required, in the operation of that account, to take reasonable care to protect the interests of the bank on, "to ensure the proper working of the account".

On the facts of the case banks had a good defence to an action by a customer for a declaration that they were not entitled to debit his accounts with cheques forged by his own staff.

Dates of hearing: 12th - 16th & 19th - 22nd December, 1983

Date of handing down of judgment: 27th January, 1984

IN THE COURT OF APPEAL

Civil Appeal
No. 103 of 1983

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. Cons, Fuad, JJ.A. & Hon. Hunter, J.

Date of Judgment: 27th January, 1984

__________

JUDGMENT

__________

Hon. Cons, J.A.:

1. This appeal raises issues of considerable importance to the banking world, in particular, how far does a customer who maintains a current account with a bank owe a duty of care to the bank with regard to the operation of the account. Is that duty limited to particular circumstances which are now well established, i.e. not to draw a cheque in such a manner as may facilitate fraud by a third party : London Joint Stock Bank v. MacMillan[1]; and to inform the bank immediately of any forgery of which he becomes aware : Greenwood v. Martins Bank Ltd.?[2] Or is it the more general duty for which the banks now, contend "to take such precautions as a reasonable customer in his position would take to prevent forged cheques being presented to his bank for payment" (the "Wider ditty")? Or if not that, is it at least "to take such steps to check his monthly bank statements as a reasonable customer in his position would take to enable him to notify the bank of any items debited therefrom which were not or may not have been authorized by him" (the "narrower duty").

2. The learned judge below - in a judgment which, if I may say so, dealt clearly and concisely with all the submissions put forward - rejected both duties. He found nothing to support them in principle and felt that the weight of authority was against them. However he concluded that if in fact, or rather in law, there were such duties, then on the particular facts of the case the plaintiff was in breach of both duties in relation to all three defendant banks. That conclusion has not been challenged.

3. The plaintiff is a modern, medium sized and reasonably successful textile company which has been in business in Hong Kong since 1957. In September of that year the plaintiff opened an account with the third defendant, The Chekiang First Bank Ltd. Cheques were authorized to be signed by a Mr. Chen, the Managing Director, or by any two of four nominated signatories. In November 1961 another account was opened, this time with the second defendant, The Bank of Tokyo Ltd., having similar arrangements for the drawing of cheques. One year later, i.e. in November 1962, a third account was opened with the first defendant, The Liu Chong Hing Bank, again with similar provisions for the signing of Cheques. We are told that these accounts were net the main bank accounts of the company, these being held in yet other banks not party to these proceedings, nor for the most part subject to the malpractices from which these proceedings have arisen.

4. The plaintiff's banking arrangements operated smoothly until 1972. In that year the company took into employment the fourth defendant, a young accounts clerk by the name of Leung. He was given responsibility for the books of two divisions of the company, divisions whose accounts were kept to the greater extent with the first and second of the banks I have just mentioned. Mr. Leung was quite dishonest, and within a few months of his engagement was using his position for his own benefit. He would either obtain cheques from Mr. Chen by way of forged documents or would get Mr. Chen to sign cheques on which the words "or bearer" had not been deleted. These he would pay into accounts which he had opened for himself in names similar to those of genuine suppliers to the company. Later on, in November 1977, when his superior, a Mr. Wang, retired on account of ill health and he was given similar responsibility with regard to the Liu Chong Hing Bank, Mr. Leung extended his depredations into that account. By this time he had abandoned his earlier methods in favour of the more simple forgery of Mr. Chen's signature. So he carried on until May of 1978, when his dishonesty was exposed by the new chief accountant who, very properly, carried out routine checks which had been ignored by his predecessor.

5. All told Mr. Leung made away with some $7,000,000 by fraud and forgery together. We understand that a small amount has been recovered through a compromise reached with his wife regarding certain properties which had been purchased with the monies taken. This has been applied to the claim against them in fraud. We are concerned here only with the forged cheques. They amount to roughly $5,500,000. The question is whether the three banks were entitled to debit those cheques, as they innocently did, to the plaintiff's current accounts.

6.I turn then to the submissions of law advanced in support of the "wider" and "narrower" duties set out at the beginning of this judgment. They may be conveniently considered under the headings of "Implied Contract" and "Tort". I will come later to the effect of express terms which had been agreed between the plaintiff and the banks.

Implied Contract

7. It is not uncommon for a court to imply into a contract terms which have not been expressly included by the parties. The two most common instances were set out by Lord Wilberforce in Liverpool City Council v. Irwin and Another[3] : -

"Where there is, on the face of it, a complete, bilateral contract, the courts are sometimes willing to add terms to it, as implied terms : this is very common in mercantile contracts where there is an established usage : in that case the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain. In other cases, where there is an apparently complete bargain, the courts are willing to add a term on the ground that without it the contract will not work - this is the case, if not of The Moorcock (1889) 14 P.D. 64 itself on its facts, at least of the doctrine of The Moorcock as usually applied. This is, as was pointed out by the majority in the Court of Appeal, a strict test - though the degree of strictness seems to vary with the current legal trend -"

Lord Cross, in the same case, at page 258 adopted what is usually called the "officious by-stander test" : -

"Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give - as it is put - "business efficacy" to the contract and that if its absence had been pointed out at the time both parties - assuming them to have been reasonable men - would have agreed without hesitation to its insertion. "

8. Although the substantial submission of Mr. Morrit for the Liu Chong Hing Bank, whose arguments were adopted by counsel for the other two, is that the two duties are derived from a principle of law independent of those just set out, he does nevertheless submit that a properly informed by stander would give an unhesitating answer in his favour for both. By "properly informed" he means that the by-stander would be appraised of the accepted implications of MacMillan and Greenwood, together, in this instance, with the express obligation of the banks to render monthly statements, which by reason of Lloyds Bank Ltd. v. Brook[4] have to be prepared with reasonable care as to their accuracy.

9. For myself I do not, see it that way. It is the presumed intention of the parties that is material and I do not think that the average customer would testily suppress the officious by-stander who proposed either or both terms. I think he would at least say "I shall have to think about that".

10. The case of Liverpool City council v. Irwin(3) itself was one of landlord and tenant. The council had, in 1966, erected several tower blocks, 15 storeys high, each containing some 70 dwelling units. Access to these was provided by a staircase and two electrically operated lifts. Another facility provided was an internal chute into which tenants in the block could discharge rubbish or garbage for collection at ground level. There had unfortunately been a consistent history of trouble in one of the blocks, due in part to vandalism, in part to non-cooperation by tenants and in part, it was said, to neglect by the corporation. Eventually some of the tenants refused to pay their rent, pleading inter alia by way of defence to proceedings brought by the corporation that the corporation was in breach of an obligation implied by law to keep the "common parts" in repair.

11. There was no express obligation of this kind imposed upon the council. Such documents as there were imposed obligations only upon the tenants. Nevertheless their Lordships held that there was an implied obligation on the part of the council, an obligation that arose, independently of any presumed intention, as a legal incident of the particular...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT