[PRIVY COUNCIL.]

AND

ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES.

Bankers - Conversion of Drafts - Ratification - Approbating and Reprobation.

The respondents' manager, without their authority and fraudulently, obtained from their bankers, in exchange for cheques drawn by the respondents upon the bankers, drafts for equivalent amounts drawn by the bankers upon themselves, payable to bearer, and crossed "not negotiable." These drafts the manager paid to an account which he had with the appellants, and they collected the amounts. The respondents sued the appellants for damages for conversion of the drafts:-

Held, that the action failed, since the respondents could not ratify the act of their manager in obtaining the drafts, so as to have a title to sue, without also ratifying his subsequent dealing with the drafts, the form of which made collection through a bank necessary.

Judgment of the Supreme Court reversed.

APPEAL from a judgment (August 11, 1920) of the Full Court of the Supreme Court of New South Wales, reversing a judgment of Cullen C.J. in an action tried with a special jury.

The respondents brought an action against the appellants claiming damages for the conversion of certain cheques, or alternatively to recover the proceeds of the cheques as money had and received. The facts of the case are stated in the judgment of their Lordships.

The action was tried by Cullen C.J. with a special jury. The jury having returned a general verdict for the defendants, the present appellants, judgment was entered accordingly. On an appeal to the Full Court the judgment at the trial was set aside, and judgment entered for the plaintiffs. The appeal to the Full Court is reported at 20 S. R. (N. S. W.) 498.

1921. Nov. 11, 14, 15. Hogg K.C. and T. Mathew for the appellants. The verdict of the jury disentitled the Full Court from deciding against the appellants as to the cheque for 415l. The jury found either that the indorsement was valid, or that the proceeds had been duly applied. With regard to the drafts by the bankers upon themselves, referred to as "bank cheques," the appellants as holders had the right under s. 10, sub-s. 2, of the Commonwealth Bills of Exchange Act, 1909, to treat them either as bills of exchange or promissory notes. The evidence showed that according to the usage of bankers they were treated as cheques. The appellants were therefore entitled to the protection given by s. 88 to bankers who collect a crossed cheque for a customer. If that contention fails, the appellants say that the respondents could not ratify their manager's act in obtaining the drafts, so as to have a title to support the action, without also ratifying his handing them to the appellants for collection. Further, there was no ratification until the action was brought, and ratification must be subject to the dealings with the proceeds by the appellants as the manager's bankers. [Reference was made to Capital and Counties Bank v. Gordon (1); Ross v. London County, &c., Bank (2); and Akrokerri Mines v. Economic Bank. (3)]

R. A. Wright K.C. and W. Barton for the respondents. The indorsement of the cheque for 415l. was a forgery, the appellants therefore could have no rights in it. There was no evidence to support the verdict as to that cheque. Apart from ratification the property in the "bank cheques" at the date of the conversion was not in the manager: Cundy v. Lindsay (4); but in the respondents: Taylor v. Plumer. (5) It was within the scope of the manager's authority to obtain the drafts, although he was misusing his authority: Hambro v. Burnand (6); Lloyd v. Grace, Smith & Co. (7) But in any case the respondents became owners by ratifying the

(1) [1903] A. C. 240.

(2) [1919] 1 K. B. 678.

(3) [1904] 2 K. B. 465.

(4) (1878) 3 App. Cas. 459, 467.

(5) (1815) 3 M. & S. 562.

(6) [1904] 2 K. B. 10.

(7) [1912] A. C. 716.

obtaining of the drafts. The ratification did not extend to the subsequent dealings with the drafts. The respondents ratified only those acts which purported to be done on their behalf; they could not in law ratify any further act: Keighley, Maxsted & Co. v. Durant. (1) There is no case of estoppel against the respondents: Farquharson & Co. v. King & Co. (2) The appellants are not protected by s. 88 of the Commonwealth Bills of Exchange Act. The drafts were not cheques within the definition in s. 2, or under s. 66. Sect. 10 cannot be read with s. 88. Similarly under the English Act, s. 25 cannot be read with s. 82 (which section corresponds with s. 88 of the Commonwealth Act): Morison v. London County, &c., Bank. (3) The holder's power under s. 10 is merely to treat the instrument as a cheque as against persons liable upon it: see per Bowen L.J. in Vagliano Brothers v. Bank of England. (4) [Reference was also made to Capital and Counties Bank v. Gordon (5); Miller v. Thomson (6); Lee v. Zagury (7); In re Tiedemann & Ledermann Frères. (8)

T. Mathew in reply. In Gordon's Case (5) the bank was not the holder but the payee; it was pointed out that if the bank had been holders different considerations might have applied.

Dec. 19. The judgment of their Lordships was delivered by

LORD SUMNER. This appeal relates to sixteen drafts of a total value of over 16,000l., which one McClintock misappropriated in fraud of the respondents, the plaintiffs in the action. The appellants are a bank, with which McClintock kept an account of his own in the name of Robert Haynes, and as the drafts were paid by him into and collected for him through this account, the bank became the unwitting and innocent instrument of his fraud. The plaintiffs sued in conversion, or alternatively, the tort being waived, for the proceeds of the drafts as money had and received to their use. The

(1) [1901] A. C. 240.

(2) [1902] A. C. 325.

(3) [1914] 3 K. B. 356.

(4) (1889) 23 Q. B. D. 243, 261.

(5) [1903] A. C. 240.

(6) (1841) 3 M. & G. 576.

(7) (1817) 8 Taunt. 114.

(8) [1899] 2 Q. B. 66.

jury returned a general verdict for the defendants and judgment was entered for them accordingly, but on appeal the verdict and judgment were set aside and judgment was entered for the plaintiffs for 17,378l. 9s. 7d., being the amount of the drafts with undisputed interest at the rate of 6 per cent.

McClintock was the plaintiffs' manager. The frauds began in October, 1916, shortly after his appointment, when he paid into his "Robert Haynes" account an open cheque for 415l. 3s. 11d. drawn by the respondents on their then bankers, the Commonwealth Bank of Australia, in favour of R. Haynes or order. In all the other cases the respondents' cheques on the Australian Bank of Commerce, at which they subsequently kept three accounts, were, at the instance of McClintock, exchanged for drafts (called "bank cheques") drawn by that bank upon itself for equivalent amounts, and these drafts McClintock then paid into his "Robert Haynes" account, through which the amounts of them were collected for him by the defendants. Of this series of fifteen bank cheques the second, drawn for the amount of 1000l., was made payable to G. Tallis or order, and the respondents alleged that the indorsement "G. Tallis" was forged by McClintock, and that through it the appellants could derive no title or defence. The other bank cheques were all drawn in favour of R. Haynes, Robt. Haynes, Robert Haynes, or Robert Haynes, Esq. It is therefore necessary to consider separately the facts as to the cheque for 415l. 3s. 11d.; the bank cheque for 1000l. in favour of G. Tallis or order; and the remaining fourteen bank cheques, among which no distinctions were drawn.

With regard to the cheque for 415l. 13s. 11d. their Lordships affirmed the judgment of the Supreme Court, finding that a receipt produced and purporting to be signed by Haynes was "not evidence such as twelve reasonable men could rest any verdict upon, if indeed (with the signature unproved) it was evidence at all," that the proceeds of the cheque had been applied in discharge of the respondents' debt.

As to the bank cheque drawn in favour of G. Tallis or order, the facts are short. The plaintiffs called a witness,

a Mr. Tonkin, who said that he knew a Mr. George Tallis and the indorsement was not in his writing, but that he did not know that there might not be other George Tallises or G. Tallises about. The counterfoil of the cheque, in exchange for which this bank cheque was issued, was filled up "Geo. Tallis instalment Russell Street property, due October 15, 1917, time extended till to-day," a statement of the purpose for which the cheque was drawn which, fully pursued, might have led to some identification of the payee of the cheque with the gentleman whom Mr. Tonkin knew. Their Lordships do not find in the record that this was done. The accountant to the trustees "knew of a Mr. George Tallis as having business with the trustees," but carried the matter no further. Mr. George Tallis may have been so well known in Sydney that it was not thought necessary to give evidence as to his business, but no assumption can be made on the subject. The matter was for the jury. It was for them to say whether they were satisfied that the indorsement "G. Tallis" on this bank cheque was a forgery, and their general verdict must be taken to mean that they were not.

There follows an important question, which is also one of fact, as to the actual authority given by the plaintiffs to McClintock. The business which the plaintiffs carried on, as trustees of the estate of John Norton, deceased, was that of publishing a newspaper in several States of the Commonwealth and in New Zealand. They were four in number. Two were ladies, one being McClintock's wife; one was a journalist resident in Queensland; the occupation and address of the remaining trustee are not stated. Mr. Perel, the Queensland trustee who was called, evidently knew little of the details of the business. According to him the trustees appointed McClintock "manager" in 1916, shortly after Mr. Norton's death. The plaintiffs' clerks said he was "general manager." No evidence was given as to the authority that is in fact customarily given to a manager of a newspaper business, and this authority is not matter of law. No doubt a manager manages, but how and under what restrictions must be proved. It was proved that one of McClintock's duties was to keep or

be responsible for keeping the books of the business, but there was little else in evidence. From the beginning he was never authorized to draw on the trustees' bank account by himself; another signature, though not that of another trustee, was always required. In September, 1917, before the date of the earliest of the fifteen bank cheques, the trustees made a further arrangement - namely, that cheques on their accounts should not only bear a second signature - that of Mr. Marsh or Mr. Conolly - as well as McClintock's, but should be countersigned by Messrs. Starkey and Starkey, the firm of accountants who acted as their auditors, and these gentlemen had to be satisfied by McClintock (though to a considerable extent they took his word) as to the purpose for which cheques were drawn.

It is common in Australia for banks, when requested, to issue to customers "bank cheques," in form drawn by themselves on themselves, in favour of a named payee or order or bearer. Such cheques are convenient in transactions where a creditor for some reason prefers not to take his debtor's own cheque. McClintock, having obtained the second signature and the accountant's counter-signature to cheques drawn by himself in the name of the trustees on the Australian Bank of Commerce and made payable to that bank itself, used to send them to the bank indorsed with a request, signed by himself alone but on behalf of the estate of John Norton, for the issue of a bank cheque, which was always to be in favour of Haynes, except in the one case of the Tallis cheque. A bank cheque was accordingly returned in exchange. This McClintock, sometimes at once, sometimes a little later, paid into his Haynes account with the defendants, and so he got the money. How he concealed his depredations from the auditors for so long does not appear, nor does it matter. It is evident, however, that this procedure largely undid the instructions given in September, 1917, as to the form of the trustees' cheques, and McClintock might almost as well have been authorized to operate on the trustees' accounts by himself. So far as these items were concerned, all that was gained was that he had to impose on the vigilance of the accountants

on each occasion by some plausible falsehood, and to make the procedure by which he ultimately purported to vouch the transaction, tally with the original lie. The plaintiffs sought to infer that his authority as general manager included the disposal at his own discretion of the proceeds of cheques, signed and countersigned with so much precaution, but in their Lordships' opinion the obvious construction, and certainly a reasonable construction, to put on the matter is that McClintock was no less audacious than dishonest, and resolutely took advantage of any unguarded loophole which he found in his employers' system of business. Their Lordships think that it would require positive and substantial evidence to show that in fact he had actual authority to obtain these bank cheques in exchange whenever he thought fit to do so.

Of evidence, however, there was remarkably little. It was proved that "there is a very large business done by means of bank cheques," but "the bulk of them are on solicitors' settlements and things of that sort, purchases of property and so on." Whatever effect this evidence might have in the case of the transaction with G. Tallis, if there ever was such a transaction, it does not apply to the other bank cheque transactions, as to which the counterfoils of the trustees' cheques only show that they purported to be in payment for paper or in reduction of an overdraft or for transfer to loan account. This evidence was used to show that, as in some cases it might be necessary - or at least common and advantageous - to obtain a bank cheque, it must be deemed to have been within a general manager's actual authority to do so whenever he thought proper. It is enough to say that it was for the jury, if they thought proper, not to accept either the contention or the grounds for it, and their Lordships think that their general verdict for the defendants shows that they negatived the plaintiffs' case on this issue - namely, that the bank cheques were theirs when their agent and manager obtained them, but were forthwith converted by the appellants. This case plainly was put to the jury both by counsel and by the trial judge, as a prior alternative to

ratification, and the jury did not accept it. This being so, the respondents fail to establish any conversion of their property by the appellants bank, which can be treated independently of their dealings with McClintock as their customer.

The plaintiffs' next, and indeed their main ground was that in asking for the bank cheques McClintock purported to act for them, even though he had no authority to do so, and that if they failed in showing that the cheques were theirs from the time when they were issued, they were, at any rate, entitled to make the cheques their own retrospectively by ratification, and that by the writ and the claim for money had and received they had done so. It was, of course, not contested that the plaintiffs could not both approbate and reprobate - that is to say, that they could not ratify one part and refuse to adopt another part of anything that was really an integral whole - but the difficulty (which is one of fact) is to say what the whole is and what is only a part. The respondents claimed to ratify McClintock's proceedings in getting the bank cheques but to disown his paying them into his own account. Thus they stopped short before the cheques reached the bank, and made the bank's collection of them a proceeding unauthorized by themselves, as owners of them, so that as against themselves there was a conversion.

There can be no doubt that McClintock's whole train of action, beginning with his indorsing on the trustees' cheques a request for the issue of bank cheques for the same amount, and going on to his paying them into his own account with the appellants' bank, was the execution of a preconceived and fraudulent scheme to transfer his employers' money into his own pockets. This feature gives unity to the whole series of events, but it is not necessary to consider whether it also binds them together into one transaction, which must be wholly repudiated or adopted wholly, for the actual form of the transactions carries the matter considerably further. McClintock's requests did not indicate whether the bank cheque was to be a cheque to order or to bearer, but the cheques issued, apparently in accordance with the bank's

custom and, at any rate, without objection by McClintock, were cheques to bearer and crossed "not negotiable." The only exception is the G. Tallis cheque, already dealt with. Unless the bank cheques, when obtained, were to be wholly fruitless and idle, it was necessary to pay them into some bank for collection, and although in truth they were passed into McClintock's own account for a fraudulent object, the proceeds so obtained might have been applied by him to the trustees' use had he been an honest man. It follows that the selection of his own bank account as the means of collecting the cheques instead of the bank account of the trustees was rather an incidental irregularity than a fresh departure, and when his action in obtaining each cheque has been covered by the respondents' subsequent authority since mandato priori æquiparatur, the authority covers both his action in obtaining the cheque and his action in collecting the proceeds, and both were done, however improperly, within the limits of the authority conferred by ratification, and were not beyond its limits altogether. It follows on the facts that the plaintiffs fail to prove a conversion by the defendants of cheques which they seek to make their own by ratification, for, if they ratify at all they ratify the bank's collection of the proceeds for account of McClintock, and if they do not ratify, nothing has been converted that ever belonged to them.

This conclusion, that in respect of the bank cheques no conversion is proved, makes it unnecessary to deal with the defences which the appellants raised at the trial under ss. 8, 10 and 88 of the Commonwealth Bills of Exchange Act, 1909, and their Lordships' Board desires not to be taken as expressing or as having formed any opinion upon these questions. The result on the whole is as follows: Except as to the first cheque the appeal succeeds; and, the amount of the first cheque being trivial relatively to the whole claim, the appellants should have the costs of this appeal, nor should they pay any of the costs of the motion to the Full Court, which is now appealed against. Accordingly the rule entered by the Full Court should be wholly set aside, and in lieu thereof it should be ordered that the verdict and judgment

should be entered for the plaintiffs in the action for 370l. 3s. 11d., being 415l. 3s. 11d. less 45l., which remained in McClintock's account and had not been misapplied, together with interest at 6 per cent. on that amount from the date of the writ until to-day. The plaintiffs should have the costs of the issue as to the first cheque down to the conclusion of the trial, but otherwise the appellants should have the costs of the action and of the motion to the Full Court.

Their Lordships will humbly advise His Majesty accordingly.

Solicitors for appellants: Bircham & Co.

Solicitors for respondents: Whatley & Son.