[COURT OF APPEAL]

AGIP (AFRICA) LTD. v. JACKSON AND OTHERS

[1987 A. No. 7785]

Trusts - Constructive trust - Fraud - Plaintiff's employee forging payment order in favour of company incorporated by defendant accountants - Accountants put on inquiry about fraud on plaintiff - Accountants transferring money to other accounts on behalf of clients - Whether money recoverable from accountants as money had and received - Whether money traceable as trust funds - Whether accountants knowingly assisted in furtherance of fraudulent design

The plaintiff, an oil company, held a U.S. dollar account at a bank in Tunisia, where it carried on business. Between 1983 and 1985, the plaintiff's chief accountant, who was entrusted with payment orders signed by an authorised signatory of the account, fraudulently altered the names of the payees, thus enabling clients of the defendants, the partners and an employee of an accountancy firm, to receive the money, totalling in excess of U.S. $10.5m., through accounts which companies controlled by the defendants had at a British bank. The last of those payment orders was for $518,822.92. The Tunisian bank executed it by debiting the plaintiff's account with that sum, telexing instructions to the British bank to credit the substituted payee's account with the sum, and telexing further instructions to its correspondent bank in New York to reimburse the British bank through the New York clearing system. The British bank thereby took a delivery risk, since it made the payment five hours before the opening of business in New York and before confirmation of receipt of cover. Carrying out their clients' instructions, the defendants, in disregard of the plaintiff's request for its return, disposed of most of the money paid by the British bank. In the plaintiff's action to recover from the defendants the sum of $518,822.92, the judge gave judgment for the plaintiff.

On the defendants' appeal:-

Held, dismissing the appeal, (1) that in carrying out the payment order the Tunisian bank acted as the plaintiff's agent; that the payment by that bank was in substance made with the plaintiff's money; and that, since the money was paid under a mistake of fact, the plaintiff was entitled to pursue the remedies available for its recovery (post, pp. 561D-E, H-562A,H, 570D-E).

Dictum of Lord Atkinson in Westminster Bank Ltd. v. Hilton (1926) 43 T.L.R. 124, 126, H.L.(E.) applied.

(2) That since the money which the British bank paid was its own and the money by which it was reimbursed could not be identified except through the New York clearing system, where it was mixed with other money, the plaintiff's money could be traced, not at law, but in equity only; that the equitable jurisdiction was called into being by the fiduciary relationship which the chief accountant had had with the plaintiff; and that

the defendants, having assisted in the fraud about which they had been put on inquiry, were liable as constructive trustees of the money paid by the British bank (post, pp. 565H-566A, B, G-567A, G, 569A, 570C-E).

Barnes v. Addy (1874) L.R. 9 Ch.App. 244 applied.

Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, C.A. distinguished.

Decision of Millett J. [1990] Ch. 265; [1989] 3 W.L.R. 1367 affirmed.

The following cases are referred to in the judgment of Fox L.J.:

Baden, Delvaux and Lecuit v. SociŽtŽ General pour Favoriser le DŽveloppement du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325

Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, C.A.

Barnes v. Addy (1874) L.R. 9 Ch.App. 244

Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App.Cas. 84, P.C.

Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555; [1968] 2 All E.R. 1073

Taylor v. Plumer (1815) 3 M. & S. 562

Westminster Bank Ltd. v. Hilton (1926) 43 T.L.R. 124, H.L.(E.)

The following additional cases were cited in argument:

Anglo-Scottish Beet Sugar Corporation Ltd. v. Spalding Urban District Council [1937] 2 K.B. 607; [1937] 3 All E.R. 335

Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274; [1980] 3 All E.R. 353, C.A.

Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677; [1980] 2 W.L.R. 218; [1979] 3 All E.R. 522

Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250; [1978] 3 W.L.R. 712; [1979] 1 All E.R. 118, C.A.

Brook v. Hook (1871) L.R. 6 Ex.Ch. 89

Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276; [1969] 2 W.L.R. 427; [1969] 2 All E.R. 367, C.A.

Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105; [1980] 2 W.L.R. 202; [1979] 3 All E.R. 1025

Coleman v. Bucks and Oxon Union Bank [1897] 2 Ch. 243

Diplock, In re [1948] Ch. 465; [1948] 2 All E.R. 318, C.A.

Foley v. Hill (1848) 2 H.L.Cas. 28, H.L.(E.)

Holt v. Ely (1853) 1 E. & B. 795

Joachimson (N.) v. Swiss Bank Corporation [1921] 3 K.B. 110, C.A.

Jones (R.E.) Ltd. v. Waring and Gillow Ltd. [1926] A.C. 670, H.L.(E.)

Karak Rubber Co. Ltd. v. Burden (No. 2) [1972] 1 W.L.R. 602; [1972] 1 All E.R. 1210

Lee v. Sankey (1873) L.R. 15 Eq. 204

Leslie (J.) Engineers Co. Ltd., In re [1976] 1 W.L.R. 292; [1976] 2 All E.R. 85

London Joint Stock Bank Ltd. v. Macmillan [1918] A.C. 777, H.L.(E.)

Marsh v. Keating (1834) 1 Bing. (N.C.) 198, H.L.(E.)

Montagu's Settlement Trusts, In re [1987] Ch. 264; [1987] 2 W.L.R. 1192

National Westminster Bank Ltd. v. Barclays Bank International Ltd. [1975] Q.B. 654; [1975] 2 W.L.R. 12; [1974] 3 All E.R. 834

Nelson v. Larholt [1948] 1 K.B. 339; [1947] 2 All E.R. 751

Norfolk (Duke of) v. Worthy (1808) 1 Camp. 337

Porter v. Latec Finance (Qld.) Pty. Ltd. (1964) 111 C.L.R. 177

Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation) [1970] A.C. 567; [1968] 3 W.L.R. 1097; [1968] 3 All E.R. 651, H.L.(E.)

Stevenson v. Mortimer (1778) 2 Cowp. 805

United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1; [1940] 4 All E.R. 20, H.L.(E.)

Westpac Banking Corporation v. Savin [1985] 2 N.Z.L.R. 41

APPEAL from Millett J.

By a writ issued on 1 March 1985, the plaintiff, Agip (Africa) Ltd., claimed against the defendants, Barry Kingsley Jackson, Edward Norman Bowers and Ian Duncan Griffin, recovery of U.S. $518,822.92 paid to a company in the control of the defendants pursuant to a forged payment order. Judgment was given for the plaintiff.

By a notice of appeal dated 22 August 1989, the defendants appealed on the grounds, inter alia, that the judge erred in holding that the plaintiff had title to sue; and that the judge ought to have held that the plaintiff's lack of title to sue precluded the plaintiff from succeeding either at common law for money had and received or in equity.

The facts are stated in the judgment of Fox L.J.

Peter Leaver Q.C. and Peter Irvin for the defendants. The Tunisian bank paid out on a forged instruction and thus without the authority of the plaintiff. Accordingly, the only proper plaintiff, at law or in equity, is the bank.

The relationship between a bank and its customer is founded on contract and is one of debtor and creditor, and not one of trustee and beneficiary: see Foley v. Hill (1848) 2 H.L. Cas. 28 and Joachimson (N.) v. Swiss Bank Corporation [1921] 3 K.B. 110, 127.

The paying banker must act in accordance with the mandate governing the relevant account. The bank has no mandate to pay on a forged instruction. The bank's authority to pay any particular sum derives from the specific instruction given by the customer in relation to that sum. If the specific instruction is forged and yet the bank pays, it acts outside its mandate and in such circumstances it cannot debit its customer's account unless the customer can and does ratify the payment: see National Westminster Bank Ltd. v. Barclays Bank International Ltd. [1975] Q.B. 654, 666H and Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677, 699. But ratification is not possible in the case of forgery: see Brook v. Hook (1871) L.R. 6 Exch. 89. [Reference was made to In re Diplock [1948] Ch. 466, 518.]

Whenever a bank makes a payment on behalf of its customer it pays with its own money, whether the bank is acting within or outside its mandate in making the payment. In no circumstances does it pay with the customer's money. Where a bank pays within its mandate it is entitled to debit its customer's account by way of reimbursement for the payment and the payment is therefore made on behalf of its customer. In such a case the proper person to sue is the customer, as the principal: see Anglo-Scottish Beet Sugar Corporation Ltd. v. Spalding Urban District Council [1937] 2 K.B. 607; R. E. Jones Ltd. v. Waring and Gillow Ltd. [1926] A.C. 670 and Stevenson v. Mortimer (1778) 2 Cowp.

805. If the bank pays without mandate, in the mistaken belief that it has its customer's authority to do so, it pays as principal on its own behalf and not on behalf of its customer. In such circumstances only the bank may sue: see e.g. Porter v. Latec Finance (Qld.) Pty. Ltd. (1964) 111 C.L.R. 177.

Where an agent makes a payment by mistake, but in doing so acts within his mandate and thus makes the payment on behalf of his principal (i) the principal can sue, even if he is undisclosed (Duke of Norfolk v. Worthy (1808) 1 Camp. 337); (ii) the agent may also be able to sue, at least where the agent has been induced to make the payment by the fraud of the defendant: Stevenson v. Mortimer, 2 Cowp. 805. It does not follow, as a matter of principle, that where the agent pays withoutauthority, the principal has any remedy against the payee.

Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App. Cas. 84 is not authority for the proposition that a customer whose account has wrongfully been debited by his bank may sue the payee as well as the bank. That was a case of an agent paying with the principal's money: cf. Holt v. Ely (1853) 1 E. & B. 795.

It is to be assumed that the Tunisian court applied the equivalent of English banking law in denying the plaintiff the relief sought against the Tunisian bank, namely recovery of the sum debited to the plaintiff's account. The Tunisian court must therefore be taken to have held that the bank was not entitled to debit the plaintiff's account unless it established (i) that the plaintiff had, by its negligence, been estopped from denying the bank's authority to pay, or (ii) that the plaintiff had broken the duty it owed to the bank to take care to prevent forgery, so that the plaintiff's claim failed for circuity of action: see London Joint Stock Bank Ltd. v. Macmillan [1918] A.C. 777, 817-818.

To enable a party to recover for money had and received, the mistake of the party (or his agent) must have caused it either to make the payment or to authorise its agent (such as a bank) to do so: see Barclays Bank Ltd. v. W.J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677, 695. In a case where the transfer of funds is made by a bank for its customer the customer "makes the payment" in the sense only that the bank makes the payment out of its own funds and is entitled to reimburse itself by debiting the customer's account. Thus to establish its claim the plaintiff must show that the agent's mistake caused its account to be properly debited.

As to tracing at common law, the defendants adopt the judge's analysis: [1990] Ch. 265, 285-289. As to tracing in equity, there is no cross-appeal on the judge's decision, at pp. 291-292, on "knowing receipt." There remains only the question of "knowing assistance."

The judge was wrong to hold that the defendants were at best indifferent to the possibility of fraud and that by making no inquiries of the plaintiff they were guilty of dishonest behaviour such as to make them liable to account as constructive trustees.

In order to establish the necessary degree of knowledge for the imposition of a constructive trust (a) the plaintiff must show that the defendants "assisted with knowledge in a dishonest and fraudulent design on the part of the trustees" (Barnes v. Addy (1874) L.R. 9 Ch.

App. 244, 251-252), (b) that knowledge must be knowledge of a fraud (if such it was) being practised on the plaintiff. [Reference was made to Coleman v. Bucks and Oxon Union Bank [1897] 2 Ch. 243 and Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276.]

It is immaterial that the defendant has knowledge of a different and unconnected fraud being practised on another party and assisted in that particular fraud. To extend the boundaries of constructive trusteeship to bring within its ambit strangers who have no knowledge of any fraud being practised on the plaintiff (i) would be an unacceptable expansion of the scope of the liability, as a matter of principle (see Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, 267F, 270D, 274B) and (ii) would be unjustified on the authorities. The state of mind of the defendants was that of honest and professional men who (if it be correct that the plaintiff was unaware of the payments) had been misled by their client as to the true nature of the payments being made.

Michael Tugendhat Q.C. and Michael Gettleson for the plaintiff. The judge was right to say that a banker is agent of the customer in paying third parties: see Westminster Bank Ltd. v. Hilton (1926) 43 T.L.R. 124, 126.

The fact that a payment has been made by a banker as agent does not debar the principal from recovering it as money paid under a mistake of fact: see Anglo-Scottish Beet Sugar Corporation Ltd. v. Spalding Urban District Council [1937] 2 K.B. 607, 612-613 and R. E. Jones Ltd. v. Waring and Gillow Ltd. [1926] A.C. 670.

Where the payment has been made by the agent, the effect is to give an additional cause of action to the agent: see Duke of Norfolk v. Worthy, 1 Camp. 337; Holt v. Ely, 1 E. & B. 795 and Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia, 11 App. Cas. 84. This is so even where there has been a forgery: Marsh v. Keating (1834) 1 Bing. (N.C.) 198. [Reference was made to United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1.]

Payments made under a mistake of fact often are the result of carelessness, but carelessness is not a bar to relief. There would be an inconsistency in the law if the principal's carelessness both prevented the principal recovering against the agent and left him with no remedy against the payee. The agent could not then sue, because that would involve recovery from the payee after he had been indemnified by the principal, and the payee would be left with a windfall.

If the defendants are right that it is only the Tunisian bank which has a claim for money paid under a mistake of fact, then the plaintiff still has a claim for restitution on the footing that it has been compelled to pay the bank. On this basis, assuming that the defendants would have been indebted to the bank for money paid under a mistake of fact, then the plaintiff has been compelled to discharge that debt.

As to the disposal of the money, payment by an agent in accordance with what he wrongly believes to be the wishes of his principal is not enough to relieve him of liability to the principal: Lee v. Sankey (1873) L.R. 15 Eq. 204, 211. Nor is it reasonable to apply the defence of accounting to a principal in favour of an agent who does not produce

evidence of the identity of the principal or the manner of payment. To do so is to encourage agents to deceive the principal and the court. [Reference was made to In re Montagu's Settlement Trusts [1987] Ch. 264, 275, 276B.]

The money came into the hands of the defendants with notice from Lloyds Bank that the bank had received it "by order of [the plaintiff] in respect of an invoice." If the purpose of such a payment fails a constructive trust may arise: Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation) [1970] A.C. 567. The invoice was not in fact discharged by the defendants' principals and the defendants have not produced evidence that they had any reason to believe that the invoice had been or would be discharged. Even if they thought the reference to the invoice indicated a mistake, a constructive trust can arise where money has been paid under a mistake of fact: see Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105, 119-120.

The defendants had actual knowledge of the fraud on the plaintiff, or, as accountants, would have obtained such knowledge but for shutting their eyes to the obvious or wilfully and recklessly refraining from making such inquiries as reasonable accountants would have made. In those circumstances, the defendants became constructive trustees of the money: see Baden, Delvaux and Lecuit v. SociŽtŽ General pour Favoriser le DŽveloppment du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325 and Westpac Banking Corporation v. Savin [1985] 2 N.Z.L.R. 41.

The passage in Barnes v. Addy, L.R. 9 Ch.App. 244, 251-252 which is generally cited to support the view that there should be no liability as a constructive trustee in the absence of fraud or dishonesty of the defendant was written at a time when responsibility for negligence was very different, and does not reflect the circumstances in which agents expect to be liable generally today. [Reference was made to Karak Rubber Co. Ltd. v. Burden (No. 2) [1972] 1 W.L.R. 602, 629, 630 and Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555, 1590.]

Alternatively, the plaintiff may trace at law. The advantage of a common law claim is that it is not necessary to show an initial fiduciary relationship, and it is irrelevant whether or not the money has been paid away, and if it has, in what state of mind. [Reference was made to In re J. Leslie Engineers Co. Ltd. [1976] 1 W.L.R. 292; Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321; Marsh v. Keating, 1 Bing. (N.C.) 198; Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274 and Nelson v. Larholt [1948] 1 K.B. 339.]

Leaver Q.C. replied.

21 December. The following judgments were handed down.

FOX L.J. This is an appeal by the defendants from a decision of Millett J. The following account of the facts follows substantially that of Millett J. [1990] Ch. 265, 274-282. I set it out again here for convenience of reference.

The action was by Agip (Africa) Ltd. ("Agip") to recover a sum of U.S. $518,822.92, of which it was fraudulently deprived by an employee. Agip sought to follow funds telegraphically transferred by its bank in Tunisia as a result of forged instructions, and to recover them not from the recipient company but from the persons who controlled that company and caused it to part with them, namely, the first and third defendants. Most of the money was paid away and probably found its way to confederates of the fraudulent employee. The balance, which amounts to about $45,160, has been paid into court; the defendants made no claim to it. Agip did not contend that the defendants were parties to the fraud and had actual knowledge of it. The claim was at common law for money had and received. In the alternative, it was contended that the defendants were bound to account in equity as constructive trustees. As against the first and second defendants, Agip relied on the mere receipt of the money. In addition, however, it was alleged that all the defendants, in particular the first and third, were guilty of wilful and reckless failure to make inquiries in order to satisfy themselves that they were not acting in furtherance of a fraud.

The frauds

Agip was incorporated in Jersey and is a wholly owned subsidiary of Agip S.P.A. of Milan, an Italian oil company, which is itself a subsidiary of E.N.I., the Italian state holding company. Agip's business is mainly concerned with oil exploration in Africa. In the late 1970s and early 1980s, it was drilling for oil in Tunisia, both on its own behalf and with other companies, under permits and concessions granted by the Tunisian Government. The Tunis branch of Agip held a U.S. dollar account at the Banque du Sud in Tunis, from where payments were made to overseas suppliers.

Over a period of many years, both before and after 1983, when the defendants first appeared in the story, Agip was systematically defrauded of millions of dollars by its chief accountant, Mr. Zdiri. He was not a director and not an authorised signatory in respect of Agip's bank account but it was his duty to place the completed payment orders and the invoices to which they related before the authorised signatory and get his signature to them. It was also his responsibility to take the signed orders to the bank or entrust them to a subordinate for that purpose. From time to time, however, Mr. Zdiri fraudulently altered the name of the payee of the orders and so diverted the payment to a recipient of his own choosing. Between March 1983 and January 1985 alone sums of more than $10.5m. were fraudulently diverted in this way: not less than 28 payment orders were involved. The payees in the orders as altered, except Baker Oil Services Ltd., were all companies registered in England. Baker Oil Services Ltd. ("Baker Oil") was registered in the Isle of Man. All were managed by the defendants from the Isle of Man. Seven different payee companies were used in succession. Each had a dollar account at the High Holborn branch of Lloyds Bank into which the money was paid. The present action was concerned with the sum of

$518,822.92, which was paid on 8 January 1985 to Baker Oil. This was the last of the diverted payments. The frauds were discovered soon afterwards.

The defendants

The first defendant, Mr. Jackson, and the second defendant, Mr. Bowers, practise in partnership together as chartered accountants in Douglas, Isle of Man, under the name Jackson & Co. The third defendant, Mr. Griffin is an employee of that firm. At all material times they were acting on the instructions of their client, Monsieur Yves Coulon, a French lawyer. He was almost certainly acting for other principals whose identity is not known.

Jackson & Co. were introduced to the High Holborn branch of Lloyds Bank in March 1983 by Mr. Humphrey, a partner in the well known firm of Thornton Baker. Jackson & Co. probably took over an established arrangement. Thenceforth they provided the payee companies. Those companies each had a purely nominal share capital, which was usually registered in the names of service companies provided by Jackson & Co. In each case Mr. Jackson and Mr. Griffin were the directors and the authorised signatories on the company's account at Lloyds Bank. In the case of the first few companies Mr. Humphrey was also a director and authorised signatory. Any authorised signatory could sign. None of the companies had any assets or carried on any business activity. None of them was known to or had any dealings or contact with the plaintiffs. In the case of each company except Baker Oil, after two or three payments had been received and paid out, the account was closed and a new account opened for the successor company. Its predecessor was then promptly put into liquidation and Mr. Bowers was appointed liquidator. The payee companies' bank statements all showed the receipts to be derived from payments made by Agip.

When a payment was received by the payee company it was immediately transferred, usually on the same day, to another company, Euro-Arabian Jewellery Ltd. ("Euro-Arabian"), which also maintained a dollar account at the same branch of Lloyds Bank. Euro-Arabian was registered in England. Mr. Jackson was one of three directors. He, Mr. Griffin and Mr. Humphrey were the authorised signatories of its account at Lloyds Bank; any one of them could sign. There is no evidence that Euro-Arabian carried on any genuine business activity. It was not suggested that it was known to or had any dealings or contact with Agip. As soon as it received a payment from a payee company it paid it out to parties overseas. Most of the money went to Kinz Joailler S.A.R.L. ("Kinz"), a company incorporated in France and described as carrying on a jewellery business in Paris and elsewhere in France. It appears to have been a wholly owned subsidiary of Euro-Arabian. Mr. Jackson was its sole director but was probably a nominee. M. Coulon was its legal adviser. It was not suggested that it was known to Agip. Other payments were made to M. Coulon and a Mr. Chouck ben Abdelaziz, who has not been further identified.

M. Coulon was introduced by the defendants to Mr. Breeze, the assistant manager of the High Holborn branch of Lloyds Bank. M.

Coulon had no authority to operate the accounts of any of the payee companies or of Euro-Arabian but Mr. Breeze was authorised to disclose information concerning the accounts to him. Mr. Breeze was told to expect payments from Tunis at the rate of approximately $500,000 a month. When a payment was expected he would be notified by Jackson & Co. and would then contact the overseas division of Lloyds Bank and ask to be informed when the payment was received. As soon as he learned that the money had arrived he would telephone Jackson & Co. and inform them. They would not, however, give him immediate instructions for the disbursement of the money. There would be a short interval, presumably while they sought instructions from M. Coulon. Disbursement would usually be effected later on the same day on the authority of written instructions delivered by Jackson & Co. by hand to the Douglas branch of Lloyds Bank and read over the telephone to the High Holborn branch. The written instructions, usually signed by Mr. Jackson, would follow later by way of confirmation. M. Coulon would visit London from time to time and discuss the state of the accounts with Mr. Breeze. They would lunch together. Mr. Breeze clearly understood M. Coulon to be behind the arrangements and to be the person whose instructions were being relayed to the branch by Jackson & Co. It has not been suggested that he was mistaken.

The defendants' state of mind

The defendants elected to call no evidence. Their state of mind was therefore largely a matter of inference. Agip relied, however, on three documents as providing some evidence of this. The first was the minutes of the first meeting of the directors of Keelward Ltd., one of the payee companies, held at the offices of Jackson & Co. in Douglas on 22 March 1984. The meeting was attended by Mr. Jackson and Mr. Griffin, who were appointed directors of the company with immediate effect, and the minutes, signed by Mr. Jackson, stated:

"Mr. Jackson reported that the company had been invited to act as agent for Euro-Arabian . . . in the receipt of moneys from Tunisia. This formed part of a long-standing arrangement between the beneficial owners of Euro-Arabian . . . the Banque du Sud in Tunis and an offshore subsidiary of Agip S.P.A., called Agip (Africa) Ltd. In essence, the arrangement resulted in the extraction of moneys from Tunisia in circumvention of the Tunisian exchange control regulations. Keelward Ltd. would act merely in a fiduciary capacity and, in the absence of specific instructions to the contrary, all moneys received were to be passed immediately to the account of Euro-Arabian . . . with Lloyds Bank Plc. at 58, High Holborn, London . . . Euro Arabian . . . would ensure that Keelward Ltd. was paid an appropriate amount to cover fees, expenses, etc."

The second consisted of an attendance note made by Mr. Smyth, a partner in the firm of Knapp-Fishers, solicitors, of a meeting with Mr. Jackson and M. Coulon on 24 July 1984 when his advice was sought in connection with the payments. Objection was taken on behalf of the defendants to its admissibility. Mr. Smyth was not called as a witness

and there is no evidence that his attendance note was ever seen by any of the defendants. There was thus no admissible evidence of the truth of its contents and the judge disregarded it.

The third document consisted of a letter dated 14 August 1984 and addressed by Mr. Smyth to Mr. Jackson at Jackson & Co. It was headed "Euro-Arabian Jewellery" and the original was obtained from the liquidator of Euro-Arabian. It contained the considered advice which Mr. Smyth gave following his meeting with Mr. Jackson and M. Coulon on 24 July. In the absence of evidence to the contrary, the judge inferred that it was seen by Mr. Jackson and was therefore admissible as evidence of the advice he received at the time. I agree with that. It dealt first with the question of the recovery by the Tunisian Government or Agip from Lloyds Bank of money in the bank's possession:

"Turning now to Agip, Agip may be able to establish a cause of action by claiming that the payments were obtained by fraud. Agip could also rely on English law as the fraud would presumably have taken place within England, at the time when the moneys were transferred out of Agip's account into the account of the U.K. company. However, although Agip may be able to establish a cause of action, it would still be necessary for Agip to establish fraud (as defined under English law) for any action for the recovery of the moneys to be successful."

The letter then dealt with the disclosure by Lloyds Bank of the banking transactions:

"Because of the general principle of banking confidentiality, it would be extremely difficult for the Tunisian Government or Agip to obtain an order requiring Lloyds Bank to disclose banking transactions, unless disclosure is ordered by the English courts . . . However, if Agip could establish a cause of action by reason of possible frauds, it might obtain an order for the disclosure of banking transactions . . . As in our case, there would appear to be no clear case of fraud under English law, this could frustrate early disclosure by Lloyds Bank, although Agip could seek an injunction whereby the moneys in Lloyds Bank account would be 'frozen' until the matter came to full trial."

Finally, the letter dealt with tracing the money after liquidation of the payee companies:

"If Agip can establish fraud, recovery of the moneys after the recipient companies have been liquidated will depend, to some extent, upon whether or not Lloyds Bank held the moneys on trust for Agip."

The payment to Baker Oil

Baker Oil was incorporated on 12 October 1984 with an authorised share capital of £2,000. Mr. Jackson and Mr. Griffin each subscribed for one £1 share. No other shares were issued. Mr. Jackson and Mr. Griffin were the sole directors. Jackson & Co.'s office in Douglas was the registered office. The company's name was misleading. Neither oil nor

oil services made their appearance in its memorandum of association. Baker Oil was the successor to Parkfoot Ltd. ("Parkfoot"), which had been put into liquidation on 6 December 1984 shortly after receiving, and paying out to Euro-Arabian on the same day, a sum of $502,458.33. Baker Oil then opened a dollar account, no. 11955608, at the High Holborn branch of Lloyds Bank. The mandate was completed on 17 December 1984 and forwarded to Mr. Breeze on the same day. Mr. Jackson and Mr. Griffin were the authorised signatories, the signature of either being sufficient.

On 18 December 1984, Mr. Del Sorbo, a senior officer of Agip's Tunis branch and an authorised signatory of its account at the Banque du Sud signed a payment order for $518,822.92 in favour of Maersk Supply (Tunisia) Ltd. ("Maersk") at Morgan Guaranty Trust Co. of New York. This was in payment of the hire of a vessel, Maersk Endurer, for the month of October. The invoice for that sum was dated 7 November and was due for payment within 60 days. After Mr. Del Sorbo had signed the payment order, it was fraudulently and without his knowledge altered by the substitution for the name of the original payee of the name "Beker-Oil Service Cie." (sic) with the address of the High Holborn branch of Lloyds Bank and the correct number of Baker Oil's dollar account. The altered payment order was taken to the Banque du Sud on or shortly before Friday 4 January 1985. On that day the Banque du Sud executed it by debiting Agip's account with the sum of $518,822.92, value date 7 January, and by telexing instructions to Lloyds Bank:

"Attention Freeman

"Order Agip

"Payer fil sans frais pour nous dol. U.S. 518,822á92. Beker Oil Services Cie cpte no. 11.95.56.08 aupres vous memes.

"Val 7/1.

"Reglement V/Fact 40 Meu - 07/84 du 7/11/84 . . .

"Vous couvrons aupres Citibank New York meme valeur Bank Sud."

Miss Freeman was the principal in charge of foreign services at the High Holborn branch. The branch had no telex and the message was received by Lloyds Overseas Division, where it was the responsibility of Mr. Bendon, an international manager, to assess the delivery risk. When Banque du Sud telexed its instructions to Lloyds Bank, it also telexed appropriate instructions to Citibank, its correspondent bank in New York, to debit its account at Citibank and to credit Lloyds Bank or its correspondent bank in New York with a similar amount. That necessarily involved the exposure of Lloyds Bank to a delivery risk in New York. New York is five hours behind London, and Lloyds Bank was being asked to make a payment in London on 7 January 1985 before the opening of business in New York and well before confirmation of the receipt of cover.

The High Holborn branch had already been notified by Jackson & Co. on Friday 4 January that another payment was expected and had asked to be informed by Lloyds Overseas Division as soon as it was

received. Miss Freeman heard from Lloyds Overseas Division on Monday morning, 7 January, that the money had been received for the account of Baker Oil and she so informed Mr. Breeze. He rang Mr. Griffin at about 1 p.m. and conveyed the information to him. Half an hour or so later M. Coulon telephoned from the airport and spoke to Mr. Breeze. He said that he was on his way to the bank. Mr. Breeze told him that the money had arrived.

The attempted recall

The fraud was discovered in Tunis late in the afternoon of Friday 4 January but its extent did not become apparent until the morning of Monday 7 January when Mr. Del Sorbo visited the Banque du Sud and was shown a large number of forged payment orders. These included the order for $502,458.33 in favour of Parkfoot and the order for $518,822.92 in favour of Baker Oil. He confirmed that neither company was known to Agip and that the name of the payee on the original payment order had been altered after he had signed it. He asked the bank to try to stop the two payments.

The Banque du Sud sent two messages by telex to Lloyds Bank during the afternoon of 7 January, one in respect of the payment to Parkfoot and one in respect of the payment to Baker Oil. In each case the Banque du Sud stated that according to the party giving the order the transfer had been "effectuŽ par erreur." No other explanation was given. Lloyds Bank was asked to stop the payment or, if that was not possible, to obtain its customer's agreement to reverse the transaction. Parkfoot had already paid the money away and closed its account at Lloyds Bank. It was far too late for Lloyds Bank to do anything about it and there is no evidence that it made any attempt to do so. The telex in respect of the payment to Baker Oil was received by Lloyds Overseas Division at 2.25 p.m. London time. Mr. Bendon was advised of it and spoke to the Banque du Sud. He also spoke to Miss Freeman at the High Holborn branch. He learned from her that the money had been credited to Baker Oil's account, that the customer had already been advised of the fact and that Miss Freeman held instructions to pay the money out the same day. At Mr. Bendon's request Miss Freeman spoke to Jackson & Co. She can no longer remember to whom she spoke but she reported that Lloyds Bank had received a request from the Banque du Sud for a recall. She was asked for the reason and said that no reason had been given. She was promised that the money would be left with Lloyds Bank for 24 hours or possibly just overnight "so that checks could be made." She reported this to Mr. Bendon. Mr. Bendon spoke again to the Banque du Sud and dictated a reply to the bank's two telexes that same afternoon. It was sent by cable on 9 January and confirmed by telex on 10 January. So far as material it read:

". . . I have to confirm that we had already paid the amount of U.S. $518,822.92 on the morning of 7 January 1985 to our customers Baker Oil . . . account no. 11955608 with our High Holborn branch in accordance with the instructions which you had given us on 4 January with value 7 January. Our branch have contacted their customer who refuse to refund stating that they know of no reason

why they should not have received moneys which they believe to be due to them and which they have stated to us they have already disposed of to other parties. I regret therefore that we are unable to stop payment as you have requested."

The judge said there were significant differences between Mr. Bendon's message, which was calculated to deter the Banque du Sud from pursuing its attempt to recall the money, and Miss Freeman's evidence of what she was told by Jackson & Co. and reported to Mr. Bendon. It is possible that there was some misunderstanding between them but the judge doubted it and, in the absence of any evidence from the defendants, he was not prepared to infer one. Miss Freeman, he said, was a clear and reliable witness but after that lapse of time could not be expected to remember everything she had heard and reported to Mr. Bendon. In the witness box Mr. Bendon, the judge found, was confused about the relationship between the two payments whose recall had been sought but there is no reason to think that he was confused about it at the time, and the message he dictated speaks for itself. His failure to mention Jackson & Co.'s offer to keep the money in Lloyds Bank for a short period appears extraordinary but it was, in the judge's view, to be explained by the fact that from first to last he was concerned not for the Banque du Sud, still less for its customer, but for the position of Lloyds Bank. In the absence of evidence from the defendants to the contrary the judge concluded (1) that Jackson & Co. did not offer to refund the money if a good reason was given for the recall but rather that they refused to return the money unless a good reason was given, so that Mr. Bendon's statement that they refused to refund was accurate so far as it went; (2) that Mr. Bendon, rightly or wrongly, took that to mean a good reason for Lloyds Bank's insistence on the return of the money; (3) that, accordingly, he took the offer to keep the money at Lloyds Bank for a short while to be a matter between Lloyds Bank and its customer and not something to be communicated to the Banque du Sud; (4) that Mr. Bendon's statement that "they know of no reason why they should not have received moneys which they believe to be due to them" was based on something to that effect said by Jackson & Co. to Miss Freeman in order to justify their refusal to refund the money unless there was a good reason to do so; but (5) Mr. Bendon's statement that "they have stated to us they have already disposed of [it] to other parties" was probably based not on anything said by Jackson & Co. to Miss Freeman but on his own appreciation as banker of the consequences of Miss Freeman having in her possession instructions from the customer for the disposal of the money.

The disposal of the money

On the following day, 8 January, Miss Freeman spoke to Mr. Bendon again. Following their discussion she telephoned Jackson & Co. and confirmed that so far as Lloyds Bank was concerned the value was good and the money was at the customer's disposal, no reason for recall having been given. Miss Freeman then dealt with the money in accordance with the instructions which she had received by telephone on

the previous day and which were confirmed by letter dated 7 January and signed by Mr. Griffin. In accordance with those instructions, she transferred the $518,822.92, which was the only sum standing to the credit of Baker Oil's account, to an account in the same branch in the name of Jackson & Co. and closed the account. She then confirmed those transactions by letter (addressed to the secretary of Baker Oil) in which she referred to the receipt of the $518,822.92 "by order of Agip."

Jackson & Co.'s account was an ordinary partnership account. It was opened in March 1984. All three defendants were authorised signatories. Any one of them could sign. Immediately before the transfer from Baker Oil, the account was $7,911.80 in credit. As a result of the transfer it became $526,734.72 in credit. On 9 January, in accordance with instructions contained in or confirmed by a letter dated 8 January and signed by Mr. Griffin, $518,000 was transferred from the account to Jackson & Co.'s clients' account at the Isle of Man Bank Ltd. in the Isle of Man which was newly opened for this purpose. After two other small debits, this left the account of Jackson & Co. at Lloyds Bank $8,560.80 in credit. Although the account was an ordinary partnership account it was being used as a clients' account, for Jackson & Co. did not receive the money for their own benefit but as nominees for their clients. On 15 January the greater part of the $518,000 was paid out by the Isle of Man Bank in accordance with a letter of instructions of the previous day by Jackson & Co. The money was paid: $400,000 to Kinz; $70,000 to Mr. Chouck ben Abdelaziz; and dollar equivalent of Ffr. 34,330 to M. Coulon.

In a subsequent letter, dated 22 February 1985, to Agip's solicitors the defendants' solicitors stated, inter alia:

"If your clients can persuade ours that the funds in question have been stolen or otherwise improperly misappropriated our clients will co-operate immediately and disclose all material facts within their knowledge and do all in their power to preserve any such assets"(Millett J.'s underlining).

Agip relied on the words underlined as evidence that the funds were not really paid away on 15 January but remained available to the defendants. When last seen, it was pointed out, the bulk of the money was in the hands of a wholly owned subsidiary of Euro-Arabian, both companies being under Jackson & Co.'s control. The judge did not think that that was a fair reading of the evidence. The meaning of the words underlined was, he thought, far too uncertain to bear the weight placed upon them. In their context and immediately following a reference to "material facts within their knowledge," the judge thought the words "such assets" probably meant assets within their control. They still had over $45,000 within their control which they subsequently paid into court. Moreover, there was evidence that Jackson & Co. were unwilling to pay out the money as soon as they did but yielded to the importunity of their clients. The judge held that there was no ground upon which he could legitimately infer that the defendants retained control of the money and there was good reason to suppose that whatever was paid to their clients had gone for ever.

Subsequent events

Euro-Arabian and Kinz have been put into liquidation. Agip has an unsatisfied judgment against Baker Oil for the return of the money. It brought proceedings in Tunisia against the Banque du Sud for the recovery of the sums debited to its account on forged instructions but those proceedings were unsuccessful. Now it seeks to recover the $518,822.92 from the defendants.

The right to sue

Agip's claim was for money paid under a mistake of fact. The defendants' contention was that Agip had disclosed no title to sue. The basis of that contention was that the relationship between banker and customer was one of debtor and creditor. When the customer paid money into the bank, the ownership of the money passed to the bank. The bank could do what it liked with it. What the bank undertook to do was to credit the amount of the money to the customer's account, and to honour his drafts or other proper directions in relation to it. Thus, it was said, when Banque du Sud paid Baker Oil it had no authority to do so on behalf of Agip because the order for payment was forged. Further, the Banque du Sud paid with its own money.

In terms of the mechanism of payment, what happened was no different from what would have happened if the order was not forged but genuine. Banque du Sud paid the collecting bank and debited Agip's account at Banque du Sud. In practical terms the Banque du Sud paid with Agip's money in both cases and, indeed, in both cases intended to do so. In both cases the substance of the matter was that money standing to the credit of Agip's account was paid to a third party in accordance with the order or supposed order, as the case may be, of Agip. The direction was to pay from Agip's account. To say that the payment was made out of the Banque du Sud's own funds, while true as far as it goes, only tells half the story. The banker's instruction is to pay from the customer's account. He does so by a payment from his own funds and a corresponding debit. The reality is a payment by the customer, at any rate in a case where the customer has no right to require a re-crediting of his account. Nothing passes in specie. The whole matter is dealt with by accounting transactions partly in the paying bank and partly in the clearing process.

It does not advance the matter to say that the Banque du Sud had no mandate from Agip to make the payment at Agip's expense. What actually happened was that Banque du Sud did so. Moreover, when Agip sued Banque du Sud in the Tunisian courts - and I take it that Tunisian law was the proper law of the banking relationship between Agip and Banque du Sud - to have its account re-credited, it failed to obtain that relief. In those circumstances, to regard Agip as not having paid Baker Oil is highly unreal. Banque du Sud had no intention of paying with its own money. The substance of its intention, which it achieved, was to pay with Agip's money. The order, after all, was an order to pay with Agip's money. I agree, therefore, with the view of Millett J. [1990] Ch. 265, 283H that "the fact remains that the Banque du

Sud paid out the plaintiffs' money and not its own." If Banque du Sud paid away Agip's money, Agip itself must be entitled to pursue such remedies as there may be for its recovery. The money was certainly paid under a mistake of fact.

It was said that the difference between this case and a case where the bank paid with the authority (though given under a mistake of fact) of the customer, was that, in the latter case, the bank paid as agent of the customer and that, accordingly, either the principal or agent could sue. Thus, it was contended that where, as here, there was a claim to recover money paid by mistake of fact, the mistake must be that of the plaintiff or of his agent. That, it was contended, could not be established here. There was no mistake by Agip, which was simply the victim of a fraud. The only mistake was that of Banque du Sud, which paid in the mistaken belief that it had Agip's authority to do so. Banque du Sud, it was said, did not pay as the agent of Agip because it had no authority to pay. In Westminster Bank Ltd. v. Hilton (1926) 43 T.L.R. 124, 126, Lord Atkinson said:

"It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer's cheques as against money of the customer's in the banker's hands the relation is that of principal and agent. The cheque is an order of the principal's addressed to the agent to pay out of the principal's money in the agent's hands the amount of the cheque to the payee thereof."

The defendants, as I understand it, would accept the proposition as to agency but say that Banque du Sud did not pay as agent of Agip because of lack of authority. The order was forged. It seems to me, however, Banque du Sud plainly intended to pay as agent of Agip. Thus, it paid in accordance with the order as presented to it and debited Agip's account accordingly. There was no reason why it should do anything else. The order as presented to it appeared perfectly regular.

But, accepting the intention, can the Banque du Sud properly be regarded as having paid as agent of Agip? The defendants say the absence of authority concluded the point against Agip. The judge met that by saying that Banque du Sud had general authority from Agip to debit the account in accordance with instructions. That is correct but it was said that there were no instructions because the order was bad. I do not feel able to accept that. The order emanated from within Agip; it was properly signed and the amount had not been altered. Banque du Sud had no reason at all to doubt its authenticity. The Tunisian court refused to order Banque du Sud to re-credit Agip's account. For practical purposes, therefore, the order was given effect to according to its tenor as if it were a proper order. Everything that was done (i.e. the payments and the debit) stands good so far as the banking transaction is concerned. Agip cannot recover from Banque du Sud. And Banque du Sud does not seek to recover from Baker Oil. It seems to me, therefore, that the order must be regarded as having been paid by Banque du Sud as agent for Agip. That, however, does not alter the circumstance that it was money paid under a mistake of fact. The defendants accepted that a

principal could recover where there was either (i) mistaken payment by an authorised agent within his instructions or (ii) mistaken payment in breach of instructions by using money entrusted to the agent by the principal. The present case can be brought within, at any rate, the first of these.

The judge referred to the decision in Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App.Cas. 84, 91. In that case it was held that the bank had a sufficient interest to recover the money, if only to obtain relief from the consequences of its liability to its customer. Millett J. thought the decision was inconsistent with any suggestion that, far from being the wrong plaintiff, the bank was the only plaintiff. The present point, however, was not before the Privy Council in that case and I think the decision gives only limited assistance.

Looking at the whole matter, however, it seems to me that the judge correctly concluded that Agip's right to sue was made out.

Tracing at common law

The judge held that Agip was not entitled to trace at law. Tracing at law does not depend upon the establishment of an initial fiduciary relationship. Liability depends upon receipt by the defendant of the plaintiff's money and the extent of the liability depends on the amount received. Since liability depends upon receipt the fact that a recipient has not retained the asset is irrelevant. For the same reason dishonesty or lack of inquiry on the part of the recipient are irrelevant. Identification in the defendant's hands of the plaintiff's asset is, however, necessary. It must be shown that the money received by the defendant was the money of the plaintiff. Further, the very limited common law remedies make it difficult to follow at law into mixed funds. The judge's view [1990] Ch. 265, 286 of the present case was that the common law remedy was not available. He said:

"The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. It remained throughout in the possession of the Banque du Sud. No copy was sent to Lloyds Bank or Baker Oil or presented to the Banque du Sud in exchange for the money. It was normally the plaintiffs' practice to forward a copy of the payment order to the supplier when paying an invoice but this was for information only. It did not authorise or enable the supplier to obtain payment. There is no evidence that this practice was followed in the case of forged payment orders and it is exceedingly unlikely that it was. Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money."

Agip relied upon the decision of the Court of Appeal in Banque Belge pour L'Etranger v. Hambrouck [1921] 1 K.B. 321. In that case what happened was that Hambrouck was a cashier employed by Pelabon. By fraud he possessed himself of cheques purporting to be drawn by Pelabon but in fact without Pelabon's authority. The cheques (which purported to be drawn to the order of Hambrouck himself or to his order) were crossed so payment had to be made through a bank. Hambrouck, therefore, opened an account with Farrow's Bank at Richmond. He endorsed the cheques and paid them into that account. Farrow's Bank cleared them through the London and South Western Bank which collected the amount of the cheques and placed them to the credit of Hambrouck's account. It seems that no funds were paid into that account other than the amount of the forged cheques: see per Atkin L.J., at p. 331. Hambrouck was living with Mademoiselle Spanoghe to whom he paid various sums of money out of his bank account with Farrow's. Mlle. Spanoghe paid them into a deposit account of her own in the London Joint City and Midland Bank. No other sums were at any time placed in that deposit account. Certain sums were drawn out for Hambrouck's defence. The balance, £315, was the subject of the action. The Court of Appeal held that Banque Belge was entitled to recover it. Bankes L.J., at p. 328, and Atkin L.J., at p. 334, saw no objection to a claim at common law. After having referred to Lord Ellenborough's judgment in Taylor v. Plumer (1815) 3 M. & S. 562, Atkin L.J. said, at pp. 335-336:

"I notice that in Sinclair v. Brougham [1914] A.C. 398, 419 Lord Haldane L.C. in dealing with this decision says: 'Lord Ellenborough laid down, as a limit to this proposition, that if the money had become incapable of being traced, as, for instance, when it had been paid into the broker's general account with his banker, the principal had no remedy excepting to prove as a creditor for money had and received,' and proceeds to say 'you can, even at law, follow, but only so long as the relation of debtor and creditor has not superseded the right in rem.' The words above 'as for instance' et seq. do not represent and doubtless do not purport to represent Lord Ellenborough's actual words; and I venture to doubt whether the common law ever so restricted the right as to hold that the money became incapable of being traced, merely because paid into the broker's general account with his banker. The question always was, Had the means of ascertainment failed? But if in 1815 the common law halted outside the bankers' door, by 1879 equity had had the courage to lift the latch, walk in and examine the books: In re Hallett's Estate (1879) 13 Ch.D. 696. I see no reason why the means of ascertainment so provided should not now be available both for common law and equity proceedings. If, following the principles laid down in In re Hallett's Estate, it can be ascertained either that the money in the bank, or the commodity which it has bought, is 'the product of, or substitute for, the original thing,' then it still follows 'the nature of the thing itself.' On these principles it would follow that as the money paid into the bank can be identified as the product of the original money, the plaintiffs have the

common law right to claim it, and can sue for money had and received. In the present case less difficulty than usual is experienced in tracing the descent of the money, for substantially no other money has ever been mixed with the proceeds of the fraud."

Bankes L.J., at p. 328, while accepting that tracing at common law was permissible, took a narrower postion. He said that there was no difficulty about tracing at law because the money which the bank sought to remove was capable of being traced because the appellant (Mlle. Spanoghe) never paid any money into the bank except money which was part of the proceeds of Hambrouck's fraud and all the money standing to the credit of the account was now in court. Scrutton L.J., at p. 330, thought that tracing at common law was probably not permissible because the money had changed its identity when paid into the account at Farrow's. He felt, however, that the Banque Belge could trace in equity and that its claim succeeded.

Now, in the present case, the course of events was as follows. (1) The original payment order was in December signed by an authorised signatory. (2) The name of the payee was then altered to Baker Oil. (3) The altered order was then taken to Banque du Sud who complied with it by debiting the account of Agip with $518,822.92 and then instructing Lloyds Bank to pay Baker Oil. Banque du Sud also instructed Citibank in New York to debit its account with Citibank and credit Lloyds Bank with the amount of the order. (4) Lloyds Bank credited the money to Baker Oil's account on the morning of 7 January. (5) On 8 January, Lloyds Bank in pursuance of instructions from Baker Oil transferred the $518,822.92, which was the only sum standing to the credit of Baker Oil's account, to an account in the name of Jackson & Co. (6) Immediately before the transfer from Baker Oil, Jackson & Co.'s account was $7,911.80 in credit. In consequence of the transfer it became $526,734.72 in credit.

The inquiry which has to be made is whether the money paid to Jackson & Co.'s account "was the product of, or substitute for, the original thing." In answering that question I do not think that it matters that the order was not a cheque. It was a direction by the account holder to the bank. When Atkin L.J. referred in the Banque Belge case to the "original money" he was, I assume, referring to the money credited by Banque Belge (the plaintiff) to Hambrouck's account. Money from that account was the only money in Mlle. Spanoghe's deposit account. It was not, therefore, difficult to say that the money in issue (i.e. the residue of Mlle. Spanoghe's account) could be identified as the product of the original money. There were no complexities of tracing at all. Everything in Mlle. Spanoghe's account came from Hambrouck's account and everything in Hambrouck's account came from the credit in respect of the fraudulent cheque.

The position in the present case is much more difficult. Banque du Sud can be regarded as having paid with Agip's money but Lloyds Bank, acting as directed by Banque du Sud, paid Baker Oil with its own money. It had no other and, accordingly, took a delivery risk. It was, in the end, put in funds, but it is difficult to see how the origin

of those funds can be identified without tracing the money through the New York clearing system. The money in the present case did get mixed on two occasions. The first was in the New York clearing system and the second was in Jackson & Co.'s own account. The judge held that the latter was of no consequence. I agree. The common law remedy attached to the recipient of the money and its subsequent transposition does not alter his liability. The problem arises at an earlier stage. What did Jackson & Co. receive which was the product of Agip's asset? Baker Oil was controlled for present purposes by Jackson & Co. but Baker Oil was paid by Lloyds Bank which had not been put in funds from New York. It was subsequently recouped. But it is not possible to show the source from which it was recouped without tracing the money through the New York clearing system. The judge said [1990] Ch. 265, 286:

"Unless Lloyds Bank's correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of Citibank and Lloyds Bank's correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud."

I respectfully agree with that view. Accordingly, it seems to me that the common law remedy is not available.

I should add this. Atkin L.J.'s approach in the Banque Belge case amounts virtually to saying that there is now no difference between the common law and equitable remedies. Indeed, the common law remedy might be wider because of the absence of any requirement of a fiduciary relationship. There may be a good deal to be said for that view but it goes well beyond any other case and well beyond the views of Bankes and Scrutton L.JJ. And in the 70 years since the Banque Belge decision it has not been applied. Whether, short of the House of Lords, it is now open to the courts to adopt it I need not consider. I would in any event feel difficulty in doing so in the present case where, as I indicate later, it seems to me that the established equitable rules provide an adequate remedy in relation to this action.

Tracing in equity

Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is, however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being. There is no difficulty about that in the

present case since Mr. Zdiri must have been in a fiduciary relationship with Agip. He was the chief accountant of Agip and was entrusted with the signed drafts or orders upon Banque du Sud.

I come then to the circumstances in which strangers to the trust relationship (the defendants) may be made liable in equity. The are broadly as follows. (1) Knowing receipt of or dealing with the trust property: the judge held that Mr. Griffin (the third defendant) did not receive the money at all and that Mr. Jackson and Mr. Bowers (the first and second defendants) did not receive or apply it for their benefit. Accordingly, he held that none of them could be held liable as constructive trustees on the basis of knowing receipt of the money. There is no cross-appeal as to that. (2) Knowing assistance: a person may be liable, even though he does not himself receive the trust property, if he knowingly assists in a fraudulent design on the part of a trustee, including a constructive trustee. Liability under this head is not related to the receipt of trust property by the person sought to be made liable: Barnes v. Addy (1874) L.R. 9 Ch.App. 244.

The degree of knowledge required was described by Ungoed-Thomas J. in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555, 1590 as circumstances which would indicate to an honest and reasonable man that such a design was being committed, or would put him on inquiry whether it was being committed. Peter Gibson J. in Baden, Delvaux and Lecuit v. SociŽtŽ General pour Favoriser le DŽveloppement du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325, 407 gave a more expanded description of the circumstances constituting the necessary knowledge under five heads: (i) actual knowledge, (ii) wilfully shutting one's eyes to the obvious, (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make, (iv) knowledge of any circumstances which would indicate the facts to an honest and reasonable man, (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. I accept that formulation. It is, however, only an explanation of the general principle and is not necessarily comprehensive.

The judge held, and it was not challenged, that Mr. Bowers did not participate in the furtherance of the fraud at all; although he was a partner in Jackson & Co., he played no part in the movement of the money and gave no instructions about it. Mr. Jackson and Mr. Griffin were in quite a different position. Mr. Jackson set up the company structures. Mr. Jackson and Mr. Griffin controlled the movement of the money from the time it reached Baker Oil to the time it was paid out of the account of Jackson & Co. in the Isle of Man bank. On the evidence, and in the absence of evidence from Mr. Jackson and Mr. Griffin themselves, I agree with the judge that both of them must be regarded as having assisted in the fraud. That, however, by no means concludes the matter. There remains the question of their state of mind. Did they have the necessary degree of knowledge?

The first inquiry is what did they know? As to that (1) they knew that a very large amount of money was involved. It was $10m. in under two years. It had all come along the same track. (2) They knew the

origin of the money and its destination. Its origin was Agip and the destination of most of it was Kinz. (3) Agip was an oil company with operations in Tunisia. Kinz were jewellers in France. (4) There is nothing to suggest that there was any commercial reason why Agip should be paying such sums to Kinz. (5) As the judge said, they must have realised that the only function of the payee companies or of Euro-Arabian was to act as "cut-outs" in order to conceal the true destination of the moneys from Agip. And the purpose of having two cut-outs instead of one was to bar any connection between Agip and Kinz without reference to the records of Lloyds Bank.

There is also some material documentary evidence. First, there is the letter of 14 August 1984 from Mr. Smyth of Knapp-Fishers to Mr. Jackson. That contains advice directed to the possibility that "Agip may be able to establish a cause of action by claiming that the payments were obtained by fraud."

The letter further states:

"Because of the general principle of banking confidentiality, it would be extremely difficult for the Tunisian Government or Agip to obtain an order requiring Lloyds Bank to disclose banking transactions . . ."

This shows that the question of fraud was being considered and some anxiety was being felt at the possibility that Agip might obtain access to bank records. The significance of bank records is that they are or may be a signpost to the ultimate destination of the money. Why was concern being felt about what Agip might discover? If there were doubts about fraud they could be set at rest by getting in touch with Agip and disclosing what was known.

It is, of course, possible that Mr. Jackson and Mr. Griffin were honest men and that there were facts which we do not know which would demonstrate that. But, if so, they could have attended the trial and explained their position in the witness box. They did not do so. One can only infer that they were not prepared to submit their activities to critical examination. In the circumstances I think that the judge rightly came to the conclusion that they must have known they were laundering money, and were consequently helping their clients to make arrangements to conceal some dispositions of money which had such a degree of impropriety that neither they nor their clients could afford to have them disclosed.

Certain excuses, justifications and exculpatory facts were put forward. Thus, it was said that Mr. Jackson and Mr. Griffin had no cause for suspicion because Jackson & Co. took over arrangements already previously in existence and were introduced to the matter by a partner in the very well known accountants, Thornton Baker. I do not find that is of any assistance to the defendants. The respectability of the person making the introduction did not relieve Mr. Jackson from obligation to make proper inquiries as to suspicious circumstances coming to his notice then or subsequently. We do not, in fact, know what information was made available to Mr. Jackson upon his introduction to the matter. But by August 1984, Jackson & Co. cannot have supposed that the

matter was clearly free from impropriety. Knapp-Fishers were tendering advice to them about the possibility of fraud. The genesis of the advice of August 1984 requires explanation from Mr. Jackson personally and the court has received none. In my opinion, well before the circumstances giving rise to the present case, Mr. Jackson and Mr. Griffin were put on inquiry. Either they did not inquire at all or, if they did, and the inquiry disclosed innocent activities, they have not disclosed to the court what they learnt.

Next, there is the circumstance referred to in the minutes of the Keelward Ltd. meeting of 22 March 1984, that the aim was "the circumvention" of the Tunisian exchange control regulations. That minute offers no reassurance in the search for honest decisions. Not only were those in control of Keelward Ltd. invited to assist in a transaction which was itself an evasion of the exchange control laws of Tunisia but it is very evident that the money was "hot" and it would be got rid of immediately to the next in line. I do not think that persons who needed to demonstrate that they had acted honestly could shelter behind transactions or objects which were themselves disreputable. We do not even know whether they said they believed the exchange control story. It is not easy to see why they should have believed it. Why should a subsidiary of the Italian state oil corporation which was drilling or prospecting for oil in Tunisia, under licence from the Tunisian authorities, wish to take the risk of engaging in schemes to avoid the local exchange control? Jackson & Co. could have informed themselves about Agip's status without difficulty if they did not know it anyway.

The question is whether Mr. Jackson and Mr. Griffin acted honestly. The contents of the minute are not support for the view that they did. They knew that something was concealed. The fact that the concealing was labelled as a "circumvention" does not alter that; it suggests some sort of impropriety. It would be an evasion of the local law on a matter of importance to the Tunisian State. If the known facts indicate a lack of frankness, the person assisting in effecting the transaction in question must take the risk in the absence of further explanation that it is fraudulent.

Our attention was drawn to the reaction of Mr. Jackson and Mr. Griffin to the question of the recall of the funds on 7 January 1985. Agip's evidence was:

Miss Freeman: "I believe I informed [the customer] that we had received a request from the Banque du Sud for a recall of the payment. I believe the customer would have asked why the payment was being recalled. We had no reason for that. The customer said that they were unaware of the payment - the reasons for the recall, and I believe they offered to leave the fund with us for 24 hours so that checks could be made. . . ."

Mr. Breeze: "We were instructed that the moneys should be - despite the written instruction which had already been given, that we should hold the money overnight before any transfer was made . . . I understood that it was for us to ensure that there were no legal obligations for the return of the money."

It was said that the offer to leave the money with Lloyds Bank for 24 hours was inconsistent with any dishonesty. It may be that, if Mr. Jackson and Mr. Griffin had given evidence so that the judge had an opportunity of forming a view as to their character, veracity and intentions, the offer to keep the money for 24 hours might have been a circumstance which would have had some weight in reaching his overall conclusion regarding the honesty of their personal attitudes. Without such evidence, it seems to me to tell us very little. They may have felt that they had no alternative but to make the offer. The judge, I should add, found that Jackson & Co. did not offer to return the money if a good reason was given for the recall but rather that they refused to return it unless a good reason was given.

In the end, it seems to me that the most striking feature in the case is that in August 1984 Mr. Jackson and Mr. Griffin were being given advice on the possibility that a payment or payments might involve a fraud on Agip. Having got to that point it seems to me that persons acting honestly would have pursued the matter with a view to satisfying themselves that there was no fraud. But there is nothing to show that they did that. They made no inquiries of Agip at all. They let matters continue. In the circumstances, I conclude that Mr. Jackson and Mr. Griffin are liable as constructive trustees. Mr. Bowers is liable for the acts of Mr. Jackson, who was his partner, and of Mr. Griffin, who was employed by the partnership. Accordingly, I think that the judge came to the right conclusion and I would dismiss the appeal.

BUTLER-SLOSS L.J. I agree.

BELDAM L.J. I agree.

25 March 1991. The Appeal Committee of the House of Lords (Lord Bridge of Harwich, Lord Ackner and Lord Lowry) dismissed a petition by the defendants for leave to appeal.

Solicitors: Wedlake Bell; Shindler & Co.

B. O. A.