National Commercial Banking Corporation of Australia Ltd v Batty

(1986) 160 CLR 251

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(Judgment by: Brennan J)

Between: National Commercial Banking Corporation of Australia Ltd
And: Batty

Court:

Judges: Gibbs CJ
Wilson J

Brennan JDeane J
Dawson J

Subject References:
Partnership
Banker and Customer

Hearing date: 19 April 1985
Judgment date: 13 May 1986

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Judgment by:
Brennan J

Mr Batty became a partner in Mr Davis' accountancy practice on 1 January 1975. They carried on their practice under the firm name Davis Batty & Co. Mr Batty described the practice as "basically taxation work with a little bit of auditing, investment and financial advice and some secretarial work". The practice was not large. Mr Davis became a director of Robert Bushby Pty. Ltd. (which I shall call "Bushby") and had its authority to receive on its behalf two cheques drawn respectively by I.A.C. and Esanda. The I.A.C. cheque was drawn in favour of "Robert Bushby Pty. Limited or order"; the Esanda cheque in favour of "Robert Bushby Pty. Ltd. or bearer". The former was crossed "not negotiable account payee"; the latter was crossed "not negotiable". Mr Davis indorsed the former cheque by writing on the reverse "Robert Bushby Pty. Ltd. A.A. Davis (Director)". He had no authority to do so. Bushby was and remained the true owner of the cheques. On 21 January 1976, without the owner's authority, Mr Davis deposited the cheques for collection by the appellant Bank for the credit of the Davis Batty & Co. Trust Account. The Bank presented the cheques for payment and received the proceeds. The proceeds were credited to the firm's trust account. Until the middle or latter half of 1976, Mr Batty had no knowledge of Mr Davis' possession of Bushby's cheques, his depositing them with the Bank to the credit of the trust account or the Bank's crediting of the trust account with the proceeds collected. By that time, Mr Davis had withdrawn from the trust account and had misappropriated an amount representing the whole of the proceeds of the cheques. Subsequently, the partnership was dissolved. In December 1976, the trust account was closed. At the trial, the transactions on the account after the collection of Bushby's cheques were not investigated, except to show that amounts representing the proceeds of the cheques had been withdrawn from the account by February 1976. It was not established that the firm or Mr Batty personally had derived any benefit from the proceeds of the cheques credited to the trust account. Nor was it established that Mr Batty did anything to ratify Mr Davis' acts in depositing Bushby's cheques to the credit of the trust account and in withdrawing the amounts representing the proceeds of the cheques. Mr Davis died in August 1981, shortly after the present action was commenced. Bushby recovered a judgment against the Bank in an amount equivalent to the face value of the cheques together with interest.

2. The action against the Bank was brought in the Supreme Court of New South Wales. The Bank cross claimed against the former partners, but the cross claim against Mr Davis or his estate was stood over by consent. Nevertheless, the cross claim against Mr Batty was brought to enforce an alleged liability of the firm. Two causes of action were pleaded by the Bank in its cross claim: fraudulent misrepresentation and breach of an implied warranty that the firm had the authority of the true owner of the cheques to deposit them to the credit of the trust account. The cross claim for breach of warranty was dismissed at first instance and is not now pressed. The cross claim for fraud was dismissed against Mr Batty on the ground that Mr Davis had not acted in the ordinary course of the firm's business in depositing the cheques to the credit of the trust account. That ground arises pursuant to s.10 of the Partnership Act 1892 (N.S.W.) which provides:

"Where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act."

The liability of partners under s.10 for a tort committed by one partner is joint and several (s.12).

3. During the final addresses at the trial, the Bank sought leave to add a further count to the cross claim, alleging that Mr Batty had had and received the proceeds of the cheques to the use of the Bank when the Bank credited the proceeds of the cheques to the trust account. Leave to amend was refused, Yeldham J. holding that the claim was bound to fail. The Court of Appeal also held the claim was bound to fail. The Bank submits the courts below were in error. The proposed claim against Mr Batty for moneys had and received to the use of the Bank is founded on the crediting of the firm's trust account with the proceeds of the cheques. The proposed claim raises a number of questions, but the basic question is whether the firm received the proceeds of the cheques when the Bank credited the trust account. It is hardly necessary to say that a claim for money had and received to the use of another must fail if the defendant has not received the money: Scott v. Miller (1837) 3 Bing (NC) 811 (132 ER 623). Counsel for Mr Batty submitted that the mere crediting of the trust account is insufficient to found a claim against Mr Batty and that it would be necessary to show that Mr Batty knew or ought to have known of the proceeds credited to the account whilst they remained there. Evidence material to the issue could have been called, it was submitted, if the claim had been raised before the final addresses. However, for reasons presently to be stated, the absence of an opportunity to call evidence on the issue does not prejudice Mr Batty. In considering whether the proceeds of the cheques were had and received by the firm to the use of the Bank, it is helpful to analyse the transaction which was put in train by Mr Davis' deposit of the cheques.

4. The Bank did not purport to deal with the cheques as a holder for value (cf. Westminster Bank Ltd. v. Zang [1966] AC 182 ; Barclays Bank v. Astley Industrial Trust [1970] 2 QB 527 ). The Bank purported to act merely as the firm's agent for collection of the cheques, having no title to the proceeds (In re Farrow's Bank, Ld. (1923) 1 Ch 41, esp. at p 48). Nevertheless, by presenting the cheques for payment and collecting the proceeds on behalf of the firm, the Bank wrongfully converted Bushby's cheques: A.L. Underwood, Ld. v. Bank of Liverpool. Same v. Barclays Bank [1924] 1 KB 775 , at pp 785,790-791,795. Bushby's judgment against the Bank is founded on that tort. But the Bank did not cross claim for an indemnity as an agent who innocently converted the property of a third party on the defendants' instructions (cf. Kai Yung v. Hong Kong Banking Corporation [1981] AC 787 ). The loss incurred by the Bank in converting Bushby's cheques is said to be damage suffered by the Bank in consequence of the fraud of Mr Davis.

5. Yeldham J. found that Mr Davis had been guilty of fraud, though there was no direct evidence that a bank officer had been induced to collect the cheques or pay money in reliance on any representation that Mr Davis had made. The absence of such evidence was not necessarily a bar to recovery, however, for inducement may be inferred from the doing of something after the making of a representation calculated to induce the doing of that thing: Smith v. Chadwick (1884) 9 App.Cas. 187, at p 196. Whether inducement should be inferred is a question of fact dependent on all the circumstances, not a question of law. Such an inference may be drawn in criminal as well as in civil cases, as the House of Lords held in Reg. v. Lambie [1982] AC 449 (though I should wish to reserve consideration of that case for the future if other issues there discussed should arise). The representation on which the Bank relies - that the firm was duly authorized by Bushby to deposit the cheques to the credit of the trust account or that the firm was the true owner of the cheques - is said to have been made simply by Mr Davis' depositing of the cheques. Yeldham J. found that the depositing of the cheques to the credit of the trust account amounted to fraudulent misrepresentation by Mr Davis that he had the owner's authority to do so. Assuming that that finding was rightly made, the question for decision in relation to the claim in fraud against the firm is whether Mr Davis, in depositing the cheques and thereby making that representation, was acting in the ordinary course of business of the firm. Otherwise Mr Davis had no special authority from Mr Batty which would have authorized his depositing of the cheques to the credit of the trust account. A similar question arises in relation to the proposed cross claim for money had and received to the use of the Bank. I shall state why that is so.

6. A bank which credits a customer's account with the proceeds of a collected cheque has both accounted to the customer for the proceeds and borrowed the proceeds from the customer: per Scrutton L.J. in Underwood, at p.791; Joachimson v. Swiss Bank Corporation [1921] 3 KB 110 , at p 127. The borrowing results in a credit item in favour of the customer in the account between the bank and its customer. The debt represented by such an item cannot exist unless the customer has authorized the bank to collect the cheque on behalf of the customer, to pay the proceeds of the collected cheque to and to borrow the proceeds from the customer, or the customer knows and acquiesces in the bank's doing so. Mr Batty had no knowledge of the Bank's collection of the cheques and crediting of the trust account. The firm did not do anything to accept the credit and it derived no benefit from it. It is not liable for money had and received to the use of the Bank merely by reason of the posting of a credit entry in a statement of account. As between the firm and the Bank, the firm became the Bank's creditor in respect of the proceeds of Bushby's cheques only if Mr Davis had the firm's actual or ostensible authority to authorize the Bank to collect the cheques and to pay the proceeds to and borrow the proceeds from the firm. By depositing the cheques, Mr Davis purported to authorize the Bank to take those steps on behalf of the firm, and the proposed claim must fail unless the firm is bound by that purported authorization.

Therefore the primary question for decision in relation to the proposed claim is whether Mr Davis had or, as between the firm and the Bank, he is to be taken to have had, the firm's authority to deposit the cheques to the credit of the trust account. There is no evidence of any special authority having been given by the firm to Mr Davis, nor is there evidence of any representation of such an authority having been made to the Bank, either by Mr Davis or by Mr Batty. Mr Davis had no wider authority than the ordinary authority he had as a partner.

7. By the first limb of s.5 of the Partnership Act, "every partner is an agent of the firm and his other partners for the purpose of the business of the partnership". By the second limb, the authority of a partner to bind the firm extends to the doing of an act for carrying on in the usual way the business of the firm unless the partner's authority to do a particular act is excluded "and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner". The general authority of a partner to bind the firm is limited. "Each partner is an agent only in and for the business of the firm; and, therefore, his acts beyond that business will not bind the firm" (Bank of Australasia v. Breillat (1847) 6 Moore 152, at p 194 (13 ER 642, at p 658)). If a partner's act is not in fact "for the purpose of the business of the partnership" the firm is bound by his act only if it is "an act for carrying on in the usual way business of the kind carried on by the firm" and the absence of authority is unknown to the person with whom he is dealing. Acts done in the usual way of carrying on a partnership business are usually done for the purpose of the business and unless the person with whom the partner is dealing knows that the act is not done for that purpose, he may assume that it is. In this case, the partnership would be bound by the authority purportedly given by Mr Davis to the Bank on behalf of the firm to collect the cheques and to credit the proceeds to the firm's account if, but only if, the act of depositing the cheques was "an act for carrying on in the usual way" the firm's business. An act which is not done "in the ordinary course" of a firm's business cannot be "an act for carrying on in the usual way" the firm's business. (I do not need to consider the converse proposition.) Therefore, if Mr Davis' act in depositing the cheques was outside the ordinary course of the firm's business (so that no liability in tort arose pursuant to s.10), it was not "an act for carrying on in the usual way" the firm's business (so that the firm did not authorize the Bank to collect the cheques and to credit the firm's account with the proceeds). If the Bank fails on the claim founded on fraud, the proposed claim for moneys had and received to the use of the Bank must also fail.

8. The Bank relies on the principle, as applicable to the relationship of firm and partner as it is to the relationship of principal and agent, stated by Willes J. in Barwick v. English Joint Stock Bank (1867) LR 2 Ex 259, at p 266:

"In all these cases it may be said, as it was said here, that the master has not authorized the act. It is true, he has not authorized the particular act, but he has put the agent in his place to do that class of acts, and he must be answerable for the manner in which the agent has conducted himself in doing the business which it was the act of his master to place him in."

The validity of that principle was not diminished - indeed, it was reaffirmed - by Lloyd v. Grace, Smith & Co. [1912] 1 AC 716 . That case, explaining the true principle in Barwick v. English Joint Stock Bank, held that a principal is liable for the torts of an agent committed in the course of the business the agent is authorized to transact whether or not the tort is for the benefit of the principal. Thus a firm is liable for the fraud of a partner when the fraudulent act belongs to a class of acts which the partner is authorized to do in the ordinary course of the firm's business (Hamlyn v. Houston & Co. [1903] 1 KB 81, at pp 85- 86). The question in this case is whether the act of depositing the cheques was an act of a class which Mr Davis was authorized to do (or to have an employee do) in the ordinary course of the business of Davis Batty & Co.

9. Before addressing the question whether the depositing of the cheques was an act of a class authorized to be done by Mr Davis in the ordinary course of the firm's business, it is desirable to refer to a line of cases in which it has been stated or suggested that a claim for money had and received to the use of another cannot succeed against an innocent principal or partner whose agent or partner has received and fraudulently misappropriated the other's money unless, while the other's money was in the control of the firm, the innocent principal or partner knew or had the means of knowledge that that money was in the control of the firm.

10. The first case is Marsh v. Keating (1833-1834) 2 Cl. & Fin 250 (6 ER 1149); (1834) 1 Bing (NC) 198 (131 ER 1094). Fauntleroy, a partner in the firm of Marsh and Co., forged a power of attorney for the sale of stock belonging to Mrs Keating, a customer of the firm. The broker who made the sale of Mrs Keating's stock on Fauntleroy's instructions paid the proceeds to the credit of the firm's account with their bank, Martin and Co. Fauntleroy withdrew the money by the firm's cheque signed by him and misappropriated it. The firm was held liable though Fauntleroy's partners had known nothing of the forgery, the receipt of the money into the firm's account or the withdrawal of the money received. The proceeds of the sale of Mrs Keating's stock had been paid into the firm's bank account by the broker in the ordinary way and, while in the account, the proceeds were under the firm's control. As Park J. said in delivering the opinion of the Judges to the House of Lords (at p.288 (p.1163); p.219 (p.1102)), "there can be no doubt but that it was as much money under their control as any other money paid in at Martin and Co.'s, by any customer under ordinary circumstances". Once it was established that the firm had received Mrs Keating's money, the innocent partners' ignorance of Fauntleroy's fraud did not save the firm from liability to repay to Mrs Keating the proceeds of the sale of her stock. Park J. said (at pp.289-290 (p.1164); p.220 (p.1102)):

"It must be admitted, that they were so far imposed upon by the acts of their partner, as to be ignorant that the sum above mentioned was the produce of the Plaintiff's stock; but it is equally clear that the Defendants might have discovered the payment of the money, and the source from which it was derived, if they had used the ordinary diligence of men of business.

If they had not the actual knowledge, they had all the means of knowledge; and there is no principle of law upon which they can succeed in protecting themselves from responsibility, in a case wherein, if actual knowledge was necessary, they might have acquired it by using the ordinary diligence which their calling requires."

11. The next case is Jacobs v. Morris (1901) 1 Ch 261; on appeal (1902) 1 Ch 816. Louis Jacobs, the sole owner of a business carried on in the name of Jacobs, Hart & Co., lived in Melbourne. He appointed his brother Leslie Jacobs to be the London agent of the firm and he armed him with a power of attorney which, as it was held, did not empower Leslie Jacobs to borrow money though it did authorize him to operate on the firm's London bank account. Leslie borrowed money purportedly on behalf of the firm, the borrowed moneys were paid into the firm's bank account whence they were withdrawn by Leslie and misappropriated. Louis Jacobs had no knowledge of the transactions until long after the misappropriation. The issue for determination was whether Louis Jacobs was liable to the lenders for money had and received. Farwell J. at first instance said (at p.269):

"It is not sufficient to shew that the money went into the plaintiff's account: it is necessary to shew further that the plaintiff knew or had the means of knowing that it had been so paid in. This is the principle involved in the opinion of the judges in Marsh v. Keating."

And at p 271, his Lordship said:

"They therefore lent money, not to him, but to Jacobs, Hart & Co., knowing that Leslie had no power to borrow for Jacobs, Hart & Co. Knowing that, it is not sufficient for them to prove that they paid the money into Jacobs, Hart & Co.'s account, on which they knew, or ought to have known, that Leslie Jacobs had power to draw. They must go further, and shew that Louis Jacobs knew of that payment in - either that he had the benefit of it, or that he knew of it and adopted it."

The money lent had been in the firm's account and thus, for a time, legally under the control of Louis Jacobs.

12. When the case went on appeal, Vaughan Williams L.J. adopted a different interpretation of Marsh v. Keating. He said ((1902) 1 Ch 816, at pp 830-831):

"I am not sure that in Marsh v. Keating either the House of Lords or the judges whose opinion was taken meant to decide either that ignorance and want of means of knowledge will exonerate a person through whose account a sum of money has passed from responsibility, or that knowledge of the fact is essential to liability. Nothing more seems to me to have been decided than that there the defendants could not rely upon ignorance if they had the means of knowledge. ... The opinion does not say that knowledge was necessary."

His Lordship found that, but for the lender's knowledge that Leslie was receiving their cheque for a purpose foreign to the purpose for which Louis had given him authority to operate on the London bank account, the payment of the proceeds of the cheque into the bank account by Leslie acting with Louis' authority would have sufficed to make Louis liable. He said (at p.831):

"... this liability arises in the present case, if at all, from the fact that Leslie Jacobs was in fact acting under the general authority actually given by Louis Jacobs when he indorsed Messrs. Morris's cheque, and thus authorized its presentation on behalf of Louis Jacobs by the London and Westminster Bank with whose name it was crossed, and the payment of it to the London and Westminster Bank by the bank on whom Messrs. Morris had drawn the cheque. It seems to me that Louis Jacobs, by so doing, himself lent the proceeds of the cheque to the London and Westminster Bank. It seems to me that that which was done was done under an actual authority; and I doubt whether one need resort to ostensible authority or estoppel to found a charge against Mr. Louis Jacobs."

However, as Messrs Morris, knowing the terms of the power of attorney, were not misled into thinking that Leslie Jacobs had authority to borrow on behalf of Louis Jacobs and as Louis Jacobs received no benefit from the loan, his Lordship held (at p.832) that Louis Jacobs was not liable for the money lent.

13. In James v. Oxley (1939) 61 CLR 433 a fraudulent clerk, one Rees, employed by a firm of solicitors, had the firm's authority to indorse cheques drawn by clients in favour of the firm and to deposit them with the firm's bank for collection to the credit of the firm's trust account. Rees induced clients, trustees of an estate, to draw and deliver to him a cheque payable to the firm for the purpose of investing the proceeds of the cheque on the security of a mortgage. The mortgage was fictitious. Rees was acting outside the real and ostensible scope of his employment in receiving the cheque from the trustees. He indorsed the cheque, had it deposited for collection to the credit of the firm's trust account (as he was authorized to do), fraudulently induced a partner to draw cheques on the trust account for a like amount, cashed those cheques and misappropriated the proceeds. The partners had no knowledge of the fraud. The trustees were held entitled to recover against the firm on a count of money had and received to their use. Rich J. said (at p.449):

"... I think the conclusion that the solicitors were liable to the trustees for money had and received was perfectly right, however little authority the clerk possessed to do business on behalf of the firm with the trustees. He had complete authority to indorse cheques and thus instruct the bank to collect them. He exercised that authority, with the result that the solicitors' bank collected on their behalf the trustees' money from the trustees' bank. I cannot see how it could be pretended, if the matter stopped there, that the solicitors were not bound to pay it back to the trustees."

And Dixon J. noted (at p.453):

"The defendants' actual receipt of the plaintiffs' money into their trust account was ... pursuant to a chain of authority, that is, the indorsement of the instrument by Rees and its collection by the bank."

Latham C.J. alone held (at p.443) the authority of Rees to have the cheque deposited to be irrelevant. He held it to be sufficient that the partner who drew the cheque knew that the money against which it was drawn was in the account and did not belong to the firm.

14. In each of these cases, the fraudulent partner or servant had procured the payment of money into the firm's account. Pursuant to the actual authority of the person making the deposit to the credit of the firm's account, money had been credited to the account. As between the firm and the defrauded third party, the firm had obtained control of the third party's money. There was no doubt as to the receipt of the money by the firm. If a firm receives the money of a third party in the course of its business and it is misapplied by a partner while it is in the custody of the firm, the firm is liable irrespective of the knowledge or means of knowledge of the innocent partners (s.11(b)); it is only when the money is received otherwise than in the course of the business and is misapplied that the knowledge or means of knowledge of the innocent partners may be relevant. As Dixon J. pointed out in James v. Oxley, at p 456:

"The explanation of the introduction into the question of the element of 'means of knowledge' may lie in the peculiarity of the position of partners in relation to a partnership bank account upon which each partner may be empowered to draw by himself. In substance, money, though temporarily there, may never be in the actual de-facto control of any member of the firm except the fraudulent partner. He may pay a cheque to the credit of the account and immediately draw against it. In such circumstances the technical 'receipt' by the firm may be considered as insufficient to make payment into the account a receipt to the use of the plaintiff unless the other partners knew or ought to have known of the credit and of its nature."

15. In Marsh v. Keating, where the firm was held liable, either the money was received in the ordinary course of business or the partners had the means of knowledge that Mrs Keating's money was in their custody. In Jacobs v. Morris, where the firm was held not liable, the money was not received in the ordinary course of the firm's business. In the view of Farwell J., the third party failed because Louis Jacobs had no means of knowledge of the receipt. Vaughan Williams L.J. appeared to think that mere receipt would be enough, but the third party failed because he knew that Leslie Jacobs had no authority to borrow. In James v. Oxley, where the firm was held liable, the third party's money had been received but not in the course of the firm's business and the partner who drew the cheque which withdrew the money from the firm's bank account knew that the money against which the cheque was drawn had been paid into that account.

16. In none of these cases was the critical issue the issue on which this case turns, namely, did the firm receive the proceeds of the cheques? That question can be answered affirmatively only if the Bank was authorized by the firm to collect the cheques and to credit the proceeds to the trust account. If Mr Davis did not have the firm's authority to put the Bank in motion to collect the cheques, to pay the proceeds of the cheques to the firm and to borrow the proceeds from the firm, the mechanical entry of a credit item in the statement of the account could not suffice in itself to establish that the firm had received the moneys which the Bank seeks to recover. If the Bank presented the cheques for collection and purported to credit the trust account with the proceeds without the firm's authority to do so, the Bank's unauthorized conduct could hardly be the source of the liability which the Bank seeks to sheet home to the firm. On the other hand if, as between the firm and the Bank, Mr Davis is taken to have had the firm's authority to deposit the cheques, the collection of the cheques and the crediting of the trust account with the proceeds of the cheques was done under a chain of authority linking the firm with the credit.

17. If there were such a chain of authority, it existed simply because the depositing of the cheques was an act done in the usual way of carrying on the firm's business. And if that link in the chain were established, the liability of the firm to make good any loss suffered by the Bank in accounting to the firm for the proceeds of the cheques would be imposed by s.11(b) of the Partnership Act by reason of the firm's receipt of the proceeds "in the course of its business"; the liability would not arise by reason of Mr Batty's knowledge or means of knowledge that the proceeds of Bushby's cheques were for a brief time in the trust account. Therefore the question as to the necessity for knowledge or means of knowledge which was left open by Dixon J. in James v. Oxley does not arise for determination in this case. Here, the case turns on whether the firm received the money at all, not whether Mr Batty knew or had means of knowledge that the money had been received. And so it is necessary to return to the question earlier posed: was the depositing of the cheques an act of a class which Mr Davis was authorized to do (or to have an employee do) in the ordinary course of the business of Davis Batty & Co.?

18. A difficulty arises in identifying the relevant class. If an act is fraudulent, a definition of the relevant class which picks up the fraudulent element will carry the act outside the scope of the authority of a partner in the ordinary course of business, whereas a more general definition which omits the fraudulent element may leave the act within the scope of that authority: cf. Uxbridge Permanent Benefit Building Society v. Pickard [1939] 2 KB 248 , at pp 254-255, and Kooragang Ltd. v. Richardson & Wrench [1982] AC 462 , at p 473. The problem of classification is acute when the relevant act is distinguishable from the class of acts done with authority in the ordinary course of business by reference only to the circumstances which make the act fraudulent. It is not the law that an act must be treated as being within the scope of the authority of a partner in the ordinary course of business if the person who relies on the act to establish the firm's liability knows the facts which take the act outside the scope of such authority. The limits on Leslie Jacobs' authority to borrow in Jacobs v. Morris were known to the third party from the terms of the power of attorney and, in the view of Vaughan Williams L.J., the payment of the borrowed money into Louis Jacobs' bank account did not make the latter liable for the money thus received. In determining whether the relevant facts are known to the other party regard is had to the facts as they appeared to that party (Polkinghorne v. Holland (1934) 51 CLR 143, at p 157).

19. In the present case, if the relevant class of acts which Mr Davis was authorized to do within the ordinary course of business be defined simply as the making of deposits to the credit of the trust account, Mr Davis' deposit of Bushby's cheques to the credit of the trust account, being an act of that class, would be within the scope of his authority. On the other hand, if the relevant class of acts be defined by reference to the kinds of cheques which a partner is authorized to deposit to the credit of the trust account, the deposit of Bushby's cheques was within the scope of Mr Davis' authority only if those cheques answer the defined description.

20. The evidence does not support a finding that in the ordinary course of the firm's business with the Bank partners were authorized to deposit third party cheques to the credit of the trust account. The firm had given the Bank a mandate when the trust account was opened which expressly limited the Bank's authority to accept cheques for the credit of the account. The mandate was in these terms:

"to accept for the credit of the said account any cheques drafts bills of exchange promissory notes or other instruments made payable to any one or more of us."

The form of the mandate is not free from difficulty, and it was submitted that the qualification "made payable to any one or more of us" applies only to "other instruments", not to cheques, drafts, etc. That is not the natural construction of the phrase. I construe the qualification as applicable to all the preceding classes of instruments. The qualification has obvious significance when applied to cheques and other negotiable instruments. The bank is under no obligation to accept for collection cheques the title to which cannot be ascertained by reference to the terms of the cheque itself as, for example, where it is a bearer cheque and title may pass by delivery. In the same way, the limitation gives some protection to a customer to the credit of whose account another's cheque might be deposited by an agent without the customer's knowledge and who might become liable to the other if the proceeds are collected and credited to the customer's account. I take a cheque to be "made payable" to a named party when the party is the payee or the person to whom a cheque is specially indorsed; but a cheque is not made payable to a party who, not being the payee or person to whom the cheque is specially indorsed, claims to have acquired title to the cheque merely by delivery after indorsement in blank or by delivery without indorsement.

21. However, it is true that, as Mr Batty acknowledged, some cheques "payable to third parties, clients and the like" were paid into the trust account, although Mr Batty could not recall any identifiable instance of a third party cheque being paid in and there was no examination of the circumstances of the indorsement, delivery or deposit of any such cheque. Mr Batty said that the deposit of third party cheques was the exception rather than the rule. The third party cheques which Mr Batty had in mind may, for all that appears, have been indorsed specially to the firm so that they were "cheques made payable" to the firm covered by the mandate. It needs more than evidence of dubious exceptions to establish a course of business as between the firm and the Bank different from that contemplated by the mandate.

22. Some reliance was placed on the frequency with which third party cheques are deposited to the credit of trust accounts by solicitors, accountants or others. It appeared from the evidence of experienced bankers that third party cheques are regularly accepted by banks for collection and crediting to trust accounts where the customer has a good reputation, although in some circumstances the bank would think it right to make an inquiry. Two bankers agreed in evidence that third party cheques are known by banks as potential avenues of fraud. A bank's primary concern in collecting a third party cheque deposited to the credit of a customer's account is, of course, to avoid breaching the bank's duty of care to the true owner of the cheque - a breach which deprives the bank of its statutory protection under s.88D of the Bills of Exchange Act 1909 (Cth). The Bank's instructions to its officers show that its concern is allayed if the Bank can obtain effective recourse on the customer. The instructions caution officers against acceptance of third party cheques without careful inquiry to establish "that the presenter has good title" but the caution is qualified when the customer is reliable, is agreeable to the Bank's recourse on him for any claim by the drawer or payee, and the amount is "reasonable and within the customer's known financial resources". It may be an ordinary incident of banking business to accept for collection third party cheques deposited to the credit of customers' trust accounts, but that is not to say that it is part of the ordinary business of solicitors, accountants or others who have trust accounts to deposit third party cheques for collection and crediting to those accounts. It depends on the nature of the customer's business and the way in which the customer usually carries it on.

23. It was not shown that accountants ordinarily offer their clients the facility of having cheques made payable to the clients collected through their trust accounts or that it is otherwise part of the ordinary business of accountants to deposit third party cheques to the credit of their trust accounts. The depositing of third party cheques to the credit of an accountant's trust account may frequently happen, and it may be in the ordinary course of a banker's business to allow it to happen, but that is not to say that it is part of the ordinary course of business of accountants generally. The depositing by accountants of third party cheques to the credit of a trust account is not analogous to the giving of advice and guidance on matters affecting the worth of investments which the Court held in Polkinghorne v. Holland (at pp 158,159) to be within the province of a solicitor whose client seeks such advice and guidance. There may be some accountancy firms where the depositing of third party cheques to the credit of a trust account is a usual way of carrying on the business, for the ordinary course of carrying on a professional practice may be expanded by special circumstances: Marwedel v. Hamilton and Garde (1940) St.RQd 191, at p 195; Cleather v. Twisden (1884) 28 ChD 340, at pp 349-350. Davis Batty & Co. was not shown to be such a firm. If the Bank sought to show that the depositing of third party cheques to the firm's trust account was within the scope of Mr Davis' authority irrespective of the prima facie limits on that authority created by the mandate given to the Bank, evidence was needed to show that the ordinary course of the firm's business included the making of such deposits.

24. The evidence does not support a finding that the partners had authority to deposit third party cheques generally. However, evidence of the nature of the firm's business, though extremely sketchy, might support a finding of an authority beyond the limits created by the mandate. Let it be assumed that the nature of the firm's business was such that the ordinary way of carrying on the business included the depositing to the credit of the trust account of any cheques to which the firm was entitled as trustee for a client, whether or not the cheques were "made payable" to the firm or to either partner. Even if the partners' authority extended to the depositing of such cheques, there were features of the deposit of the Bushby cheques which put the Bank on notice that that deposit was not in the ordinary course of the firm's business. The firm of Davis Batty & Co. had a modest practice and the transactions on the trust account were, for the most part, for small amounts. The amounts of Bushby's cheques were large by comparison with most other amounts deposited to the credit of the trust account; the cheques were third party cheques; neither had been indorsed specially to the firm; an indorsement in blank appeared on one cheque signed by Mr Davis as a director of the payee company; and the other cheque was crossed and marked "account payee only". The cheques were being deposited to the credit of a trust account that had earlier been overdrawn. In those circumstances, the form of the cheques called for an inquiry as to why a director of a company had indorsed the company's cheque in blank and deposited it for the credit of his firm's trust account and as to why the cheques were not deposited to the credit of Bushby's account despite the marking of one cheque "account payee only". Denning J. said in Nelson v. Larholt [1948] 1 KB 339 , at p 343:

"... if the circumstances were such as to put a reasonable man on inquiry, and he made none, or if he was put off by an answer that would not have satisfied a reasonable man, or, in other words, if he was negligent in not perceiving the want of authority, then he is taken to have notice of it."

I would put the proposition somewhat differently: if a transaction appears not to be in the ordinary course of a firm's business, though on inquiry it may prove to be so, a person who deals with a partner in that transaction and makes no inquiry or fails to obtain a satisfactory answer to his inquiry, cannot hold the firm liable if the partner does not have the authority of the firm to act in the transaction. That proposition relates to the ostensible authority of the partner and it must be applied to what appeared at the time of the transaction to the person dealing with the partner. Here the Bank made no inquiry to ascertain whether Bushby's cheques were in fact cheques to which the firm was entitled as trustee. Had an inquiry been made, even an inquiry of Mr Davis, his want of authority might well have been discovered. The Bank cannot hold the firm liable on the ground that Mr Davis had ostensible authority to deposit Bushby's cheques.

25. It follows that the firm is not liable for any fraud committed by Mr Davis in depositing the cheques and did not authorize the collection of the Bushby cheques and the payment of the proceeds to the credit of the trust account. The claim in fraud was therefore rightly dismissed against Mr Batty and the claim for moneys had and received to the use of the Bank could not have succeeded against him. The appeal should be dismissed.