Banco de Portugal v Waterlow & Sons Ltd

Lorp Warrineton or Ciyrre. My Lords, these are two
appeals from an order of the Court of Appeal dated March 26,
1931, varying the order and judgment of Wright J. dated
January 12, 1931, whereby he directed that judgment be
entered for the Bank for 569,4211. with costs. The Court of
Appeal by a majority (Greer and Slesser L.JJ.) reduced the
damages to 300,000/., and unanimously dismissed a cross-
appeal by the Bank that this sum should be increased to
611,851l. Scrutton L.J. was of opinion that no larger sum
than 89221. was recoverable by the Bank. The Bank by
their appeal seek to have the damages increased to 610,392.
or alternatively to 567,040/. Messrs. Waterlow on the other
hand seek to have the damages reduced in accordance with
the opinion of Scrutton L.J.

It is now admitted by Messrs. Waterlow that they are liable
to the Bank in damages for breach of contract, and the only
question before this House is as to the damages to be awarded.

I do not propose to restate in detail the facts already related
in the opinion of the Lord Chancellor, but only to give a
summary sufficient to render my conclusions intelligible.

The Bank is incorporated under the laws of Portugal and
holds from the Government an exclusive licence for the issue
of bank notes as legal tender in Portugal and the adjacent
Islands, but this does not extend to the Portuguese Colonies.
At all material dates the currency of Portugal was composed
solely of notes issued by the Bank. They act as bankers to
the Government and carry on a general banking business
with a head office at Lisbon and a branch in Oporto and
numerous agencies in other places. At all material dates the
notes of the Bank were and they still are inconvertible, that
is to say they are not payable in gold, but only in the currency
of the State.

The unit of currency is the escudo, nearly equivalent at
par to the American dollar and denoted by the same symbol
—namely, $. The notes to which the present litigation
relates are those of 500$. It is agreed that for the purpose
of assessing damages the equivalent in sterling of 500$
would be 51.

479

H. L. (E.)

1932
—)
BANCO DE
PorRTUGAL
v.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v

BANCO DE
PORTUGAL.

480

H. L. (E.)
1932

Neary
BANco DE
PoRTUGAL

v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
BANCO DE
PORTUGAL.
Lord
Warrington
of Clyffe.

HOUSE OF LORDS [1932]

The contract, the breach of which has occasioned the
litigation, was made between the Bank of the one part and
Messrs. Waterlow of the other part, and was dated
November 27, 1922. Under it and a repeat order dated
February 20, 1924, Messrs. Waterlow printed and delivered
to the Bank 600,000 notes for 500$ each. They are known
as notes of the Vasco da Gama type, bearing as they do a
portrait of Vasco da Gama on the face. These 600,000 notes
as delivered were put into circulation by the Bank in 1923
and 1924.

'In 1925 the Bank and Messrs. Waterlow were made the
victims of an elaborate fraud on the part of one Marang and
his associates, and Messrs. Waterlow were induced, in the
belief that they were acting with the approval of the Bank,
to print and deliver to Marang 580,000 Vasco da Gama notes.
These notes were exact duplicates of the genuine notes printed
under the contract, being printed from the same plates or
from plates made from the same die. These notes were
delivered to Marang as to 200,000 in February and March
and as to 380,000 in August and September, 1925, and large
numbers were put into circulation by means of a bank known
as the Banco Angola e Metropole, formed by the conspirators
for that purpose.

It is now common ground that in printing and delivering to
Marang the 580,000 notes Messrs. Waterlow committed a
breach of their contract for which they are liable to the Bank
in damages.

There is no doubt as to the law applicable in such cases. It
is sufficient to quote the well known rules laid down in
Hadley v. Baxendale (1) in the judgment of Alderson B.:
"We think the proper rule in such a case as the present is
this: Where two parties have made a contract which one of
them has broken, the damages which the other party ought
to receive in respect of such breach of contract should either
be such as may fairly and reasonably be considered arising
naturally—i.e., according to the usual course of things, from
such breach of contract itself—or such as may reasonably be

(1) 9 Bx. 341, 354.

A. C. AND PRIVY COUNCIL.

supposed to have been in the contemplation of both parties,
at the time they made the contract, as the probable result of
breach of it." Moreover, it is well settled that a voluntary
act on the part of the injured party does not necessarily
break the chain of causation between the wrong which
occasioned the voluntary act and the damages. If the
voluntary act is one which would be reasonably expected in
the ordinary consequence of a breach of contract it is not a
sufficient answer to say that the damage would not have
happened but for the plaintiff's voluntary act.

In the present case the introduction by reason of Messrs.
Waterlow's breach of contract into the currency of Portugal
of a large number of spurious notes indistinguishable from the
genuine notes would, if some drastic step had not been at once
taken by the Bank, have had an incalculable and disastrous
effect on the economic position in Portugal as' well as on the
reputation and credit of the Bank, as the body responsible
for the issue of currency. As a consequence of the discovery,
the result of investigations made at Oporto on December 4
and 5, 1925, of the fact that a number of the spurious notes
were in circulation, the Bank on the Sunday, December 6,
determined immediately to withdraw from circulation the
whole of the Vasco da Gama notes of 500$ and to have notices
published in the papers of Lisbon and Oporto advising the
public that the cashing of the said notes would be effected at
once at the chief office of the Bank and at all its branches. Such
notices were duly published on the morning of December 7,
and from that date onwards until the process was stopped
as hereinafter mentioned all notes of the type in question
whether genuine or spurious presented at the head office of
the Bank or at any branch or agency were exchanged for
currency of another type.

It is for the loss occasioned to the Bank by the exchange of
genuine currency that the damages in this action are claimed.

On this claim the following questions arise :—

(1.) Was the loss occasioned to the Bank such a loss as in
accordance with the rules above referred to could be recovered
in damages for breach of the contract ?

A. C. 1932. 3 21L

481

H. L. (E.)
1932

—_~
BANCO DE
PorTUGAL

Uv.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
Vv

BANCO DE
PORTUGAL.
Lord
Warrington
of Clyffe.

482

H. L. (E.)
1932

"w
Banco DE
PorRTUGAL
v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
BANCO DE
PoRTUGAL.
W: ane
arrington
of Clyffe.

HOUSE OF LORDS [1932]

(2.) If so, what is the measure of such damages ?

(3.) Was there any and what date as from which by reason
of matters coming to the knowledge of the Bank subsequently
to December 7 they ought as between themselves and
Messrs. Waterlow to have ceased to exchange spurious notes
for genuine currency and thus have minimized the loss ?

(4.) In what way and to what extent ought moneys
recovered from the perpetrators of the fraud to be credited
to Messrs. Waterlow in reduction of damages ?

The first question has been answered in the affirmative by
all the judges in the Courts below, and I agree with their
decision. It is in my opinion impossible to say that, having
regard to the position at the time, and the possible consequences
both to Portugal and to the Bank itself of the circulation of
the spurious notes, the action taken by the Bank in exchanging
all the notes of the type in question whether genuine or
spurious for other genuine currency was not a reasonable
step to take, and one which might be expected to be taken
as a consequence of such a breach of contract as that in the
present case.

As to the proper measure of damages there has been a
difference of opinion in the Courts below. The majority
(Greer and Slesser L.JJ.) in the Court of Appeal and Wright J.
in the Court of first instance were of opinion that the proper
measure of damages was the face value expressed in sterling
of the genuine currency given in exchange for the spurious
notes—namely, in the present case 5]. per note of 500 escudos,
together with the cost of printing the genuine notes so given
in exchange. Scrutton L.J. on the other hand was of opinion
that the loss was confined to the cost of printing the new notes.

This is a difficult and in this case a very important question,
seeing that in one view Messrs. Waterlow would be liable for
a very large sum of money, and in the other for nothing
beyond the 10,0001. paid into Court with their amended
defence.

There are no principles applicable except such as are
expressed in Hadley v. Baxendale (1), nor are there any

(1) 9 Ex. 341.

A. C. AND PRIVY COUNCIL.

authorities which are of help. The damages are, however,
damages for breach of contract, and in such cases it has to
be remembered that they are exclusively measured by a loss
actually incurred by the Bank and capable of being quantified
in terms of money.

In reaching a conclusion it is essential to bear in mind
that the sole measure of damages on which the Bank insisted
at the trial, and still insists, is the face value, translated into
sterling at the rate of 5/. for every sum of 500$ issued by
them in exchange for a spurious note. They have maintained
throughout that in issuing genuine currency in exchange for
spurious notes they must be treated as having expended so
much cash without receiving any consideration in return, and
therefore to be the poorer by the amount so expended. This
is made quite clear by Reasons 16 and 17 in their case. They
made no attempt to prove that (except the expense of
obtaining the paper and printing the notes) they incurred any
other loss or damage, directly or indirectly, as, for example,
by the increase in the currency and the consequent depreciation
of its purchasing power, or by injury to their credit or
interference in their relations with the Government or
otherwise. All these considerations may be set aside, and
accordingly, in explaining the views I entertain, by "damages"
I mean only such damages as are claimed by the Bank.
There may be loss or damage of another kind, but this is not
in question.

The whole question in my opinion turns on the nature of
the obligation incurred by the issuing Bank under the notes
it issues. They are in effect promissory notes payable to
bearer on demand. So long as they remain in the possession
of the Bank they are merely pieces of paper, and if, for
example, they were lost or destroyed while in their possession
they could be replaced by printing other notes at the cost
of the paper and the printing.

As soon as a note is issued it imposes an obligation on the
Bank to pay to the bearer on demand 500$. This last is the
only material obligation in the present case. There may be

two others—namely, (2) to pay in gold should the notes
3 2L2

483

H. L. (E.)

1932
—H~
BANCO DE
PoRTUGAL
Vv.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v

BANCO DE
PoRTUGAL.
Yord
Warrington
of Clyffe.

484

H. L. (E.)
1932

ew~
BANCO DE
PoRTUGAL

v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
BANCO DE
PORTUGAL.

Lord
Warrington
of Clyffe.

HOUSE OF LORDS [1932]

hereafter cease to be inconvertible, and (b) to pay in some
new form of currency should any such new form be introduced,
but these possible obligations are contingent only and are
of no importance in the present case.

It is proved by the evidence of witnesses called on behalf
of the Bank itself that the only material obligation is satisfied
by exchanging the note in question for another note of like
denomination. If a judgment were recovered against the
Bank it would be satisfied by delivery of currency for the
amount.

Where, therefore, the Bank elects, as it has done in the
present case, to treat the spurious notes as on the same
footing as genuine notes, all it does is to accept an obligation
to pay the holders in currency, that is to say, in notes. To
do so, all it has to do is to take so many pieces of printed
paper from its existing stock or to have further notes created
should the existing stock be insufficient. In either case, the
loss to the Bank is, in my opinion, confined to the expense
of procuring the necessary paper and of printing the necessary
number of notes.

Wright J., at p. 93 D of the Appendix, says: "' They,"
that is to say, the Bank, "are damaged by having to assume
liability on these notes without getting anything in return.
I think this argument is correct, and I think these notes
must be taken for this purpose at their face value, just as
they would be if they had been issued by some other
institution that is not a bank of issue." With all respect,
I cannot accept the conclusion of the learned judge. It
seems to me that by treating the Bank on the same footing
as "any other institution "' he ignores the vital distinction—
namely, that the obligation incurred by the Bank is merely
to pay in other currency which it has power to create for the
purpose, whereas the institution not a bank of issue would
have to procure the necessary currency by expenditure of
money or sale of goods or in some similar way, or pay it out
of currency already in hand. In fact, the sixteenth reason
breaks down on examination, and its corollary the seventeenth
falls with it.

A. C. AND PRIVY COUNCIL.

The next question—namely, at what point of time did the
exchange of genuine currency for spurious notes cease to be
a natural result of the breach of contract, in the view I take
as to the measure of damages, does not arise for decision ; but
if it did, I should agree with the opinion expressed by
Scrutton L.J. at p. 131 of the Appendix, B. to F. He says:
"As he (Wright J.) finds that the Bank were justified in
their action on December 7 in calling in the issue and
paying all notes, he must have found" (namely, in arriving
at the conclusion that they should have ceased on December 16
to pay all the spurious notes without distinction) "that they
would have been justified, when they could distinguish the
forged notes, which innocent holders could not do, in refusing
to pay some forged notes, while paying others. Such an
action in. my opinion would destroy all confidence in the
paper currency. .... It (the unauthorized currency) was
indistinguishable to innocent holders from genuine currency,
and I cannot think the Bank was bound to sacrifice innocent
holders and the reputation of the national currency to protect
the printers, the wrongdoers."' I think the right, as against
Messrs. Waterlow, continued until December 26.

Under the circumstances no question arises as to the sum
recovered from other persons.

The result is in my opinion that the appeal of the Bank
should be dismissed with costs, and that of Messrs. Waterlow
should be allowed with costs.

I need hardly say that it is with great regret, after anxious
consideration, I have arrived at the conclusion that I must
differ from opinions for which I have the greatest possible
respect, but it is some consvlation that I do so in good
company. I should also like to say that I have been much
assisted by the very clear and forcible argument of Mr. Gavin

Simonds in reply.

Lorp Arkin. My Lords, in this case your Lordships are,
I think, agreed that, as the result of the breach of contract
by Messrs. Waterlow, the Bank of Portugal issued 209,718
500 escudo notes in exchange for forged notes innocently

485

H. L. (E.)
1932

ee
BANCO DE
PoRTUGAL
v.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v.
BANCO DE
PORTUGAL.

Lord
Warrington
of Clyffe.

486

H. L. (E.)
1932

=
BANCO DE
PorTUGAL
v.
WaTERLOW

& Sons, Lp.

WaATERLOW
& Sons, Lp.
uv

BANCO DE
PORTUGAL.

Lord Atkin.

HOUSE OF LORDS [1932]

printed by the defendants. The question is what damages can
be recovered by the Bank. The contention of Messrs. Waterlow
is that the Bank, when it issued good notes to the face value
of over 100 million escudos in return for no consideration,
suffered no damage at all except the cost of printing the good
notes. This would have appeared to me a departure from
the ordinary principles of assessing damages ; but it has found
favour with more than one judicial personage for whose
opinions I have unfeigned respect, and was urged with much
apparent zeal by eminent counsel: so that obviously it
demands careful examination. The difficulty, it appears,
only arises where the person issuing the notes is a bank of
issue and where the obligation expressed in the note is not
to pay in gold but to pay in paper currency, i.e., other notes
of the Bank. In such cases it is said the Bank have only
parted with bits of paper and their damage is completely
measured by the cost of reprinting the bits of paper. The
argument strikes home at the present time where our currency
is in the main a paper currency; and where the Bank of
England are under no liability to pay their notes in gold. I
hope to satisfy your Lordships that if the Bank of England
by fraud or breach of contract are induced to issue a million
pounds worth of notes for nothing they are entitled to recover
against the wrongdoer a million pounds in damages. The
result of the present contention is sufficiently striking. If
the issue of 10,000$ good notes by the Bank of Portugal for
nothing involves them in no loss, it would seem to result
that the issue of a similar amount for goods or obligations
of an equivalent value would be complete gain. The Bank,
therefore, when it creates a good debt for 10,000$ by advancing
that amount in notes to its customer will appear to have
increased its assets by 10,000$ without adding to its liabilities ;
similarly, when with the same sum it buys a 1001. gold bond
or the equivalent amount of bullion. It follows that it makes
no difference to the financial position of the Bank whether
in exchange for a good note it receives a good note or a bad
note. I should have thought this result, in the language of
one of your Lordships, '' manifestly impossible " ; but rules

A. C. AND PRIVY COUNCIL.

of law have to be tested in these days, and must survive the
application of first principles.

A bank note is a promissory note issued by a bank payable
on demand. The English note contains the promise on the
face. The Portuguese note does not, but there is competent
evidence in this case that the note has the same effect. So
far the banker issuing his note incurs precisely the same
liability as a merchant issuing his note. If either fails to pay
he is liable for the face value of the note. One Bank becomes
alone entitled to issue notes; and let us assume that they
have become currency so that they can be tendered in discharge
of a debt: the position of the Bank remains the same. It is
liable on its note. If its note is payable in gold, then to a
claim on a note the Bank must pay in gold; otherwise, on
debts in general, the Bank as well as private traders will pay
in currency; and, as I have said, on default will be liable to
judgment for the face value. In any civilized State it will
not be permitted to issue notes to an unlimited amount ; it
will, if honestly conducted, in any case determine its obligations
by its possible resources; but the State will require that
behind the promises to pay there stand solid resources in the
form of gold and liquid securities ; and will impose a positive
restriction on the issue of notes beyond an amount which it
considers necessary. But this has no bearing on the liability
of the Bank to pay the face value of a note when issued.
Now let us assume that the State alters the law by decreeing
that the bank notes need no longer be paid in gold. While
that decree lasts the notes are inconvertible, the currency is
in the ordinary sense a paper currency. This happened in
Portugal in 1891 by a moratorium directed to payment in
gold which has been continued in Portugal ever since. The
position has not altered. The merchant is in precisely the
same position as before; he must pay in currency which
will as before be notes, but now inconvertible notes. If he
fails to pay he can be sued for the face value of his promissory
note. The Bank is for the first time put in the same position
as the merchant ; it is bound to pay on its note; but it need
only pay its note in currency, i.e., in its own notes; and if

487

H. L. (E.)
1932

—~
BANCO DE
PorRTUGAL

UV
WATERLOW

& Sons, Lp.

WATERLOW
& Sons, Lp.
v

BANCO DE
PORTUGAL.

Lord Atkin,

488

H. L. (E.)
1932

=<
BANCO DE
PoRTUGAL
v.
WATERLOW

& Sons, Lp.

WATERI.OW

& Sons, Lo.

v.
BANCO DE
PORTUGAL.

Lord Atkin,

HOUSE OF LORDS [19382]

it will not or cannot so pay, it can be sued for the face value
of the note. Mr. Simonds, for Messrs. Waterlow, produced
an analysis of the obligation of the Bank in issuing an
inconvertible note with which in substance I agree. It is:
(1.) to pay in other notes; (2.) when there is a return to gold,
to pay in the decreed amount of gold; (3.) if other currency
is decreed, to pay in that other currency. But how this helps
him it is difficult to see ; for on examination it will be found
that the obligation of a trader on his note is precisely the
same, except that (2.) will probably only be to pay in notes
convertible into gold instead of paying in gold itself. Now
in the case of a private trader it appears to be conceded that
his loss in similar circumstances would be measured by face
value. On this analysis the obligation of the Bank would
appear to be the same. That it meets its obligation on its
note by issuing a further note seems to have no effect upon
the nature or amount of the original obligation ; the original
obligation is met by a renewal, the Bank have only gained
time, not increased or decreased an obligation which would
be measured just as before. They have in fact done exactly
what the merchant has done: they have paid in currency ;
and their obligation is measured in the same way. If they
had an unrestricted right of issuing notes their obligation
would not be altered; they would still be liable to be sued
on default for the face value of the note, but the effect of
the unrestricted power would presumably be that the face

value of the note would have a much lower exchange value

than if there were a restricted power: so that the Bank
would either have received little value originally or the holder
of the note would intermediately have suffered loss on the
diminution of the note value. But, in fact, in the ordinary
course of civilized government, as in Portugal, restrictions
still continue. In the present case in 1925 the issue of notes
by the Bank for commercial purposes was restricted to
195,000,000$, of which they had issued 64,000,000$, leaving
a power to issue of 131,000,000$. In addition, the State
from time to time had authorized the Bank to issue notes
for State purposes, supporting these notes by a borrowing

A. C. AND PRIVY OOUNCIL.

from the Bank secured by State marketable bonds. Restric-
tions as to proportions of gold and securities reserves still
continued in existence so far at any rate as the issue for
commercial purposes was concerned. Let us assume, as
might well have happened, that the forged issue, instead of
amounting to 100,000,000$, had amounted to 131,000,000$.
If the Bank had taken the same action they would have
issued promissory notes to the full extent of their legal power.
When sued on the notes so issued in exchange for the forged
notes they could not have issued their notes in payment ;
they could have been sued for 131,000,000$, and judgment
must have gone against them for that sum. Of course, this
never-would have been permitted by the State, but ex post
facto relief has nothing to do with the question of legal
obligation: I therefore find the position to be that the Bank
by issuing its note like the trader issues its promise to pay a
fixed sum ; issues a bit of its credit to that amount ; like the
trader, it is bound to pay the face value in currency ; like the
trader, it is liable on default to judgment for the face value
exigible out of its assets ; and, like the trader, if it is compelled
by the wrong of another to incur that liability, its damages
are measured by the liability it has incurred.

It may be noted that this liability to pay the face value
is not in the least affected, as has been suggested, by the
question of convertibility. Whether the obligation is to
pay in gold or in paper, the liability remains the same to pay
500 escudos, and a judgment on the note would be for
precisely the same sum. The exchange value and the face
value are quite different matters. 500 escudos in gold will
exchange for many more goods and much more foreign
currency than 500 escudos in paper; as Messrs. Waterlow
would have found to their cost, if they had printed these
notes when they were convertible into gold. The damages
then claimed would have been twenty million pounds sterling
instead of a million. Another way of illustrating the position
seems to be this. If a person is wrongfully induced to part
with a valuable thing, whether it be goods or choses in action,
his measure of damages is the value of the thing at the time

489

H. L. (E.)
1932

—~
BANCO DE
PORTUGAL

v.
WATERLOW
& Sons, Lp.
WATERLOW
& Sons, Lp.

v

BANCO DE
PoRTUGAL.
Lord Atkin.

490

H. L. (E.)
1932

—~
BANCO DE
PorRTUGAL

v.
WATERLOW

& Sons, Lp.

WaATERLOW

& Sons, Lp.
Vv

BANCO DE
PorRTUGAL.

Lord Atkin.

HOUSE OF LORDS [1982]

he parted with it. The cost of replacement does not enter
into the measure of damages at all. If a man is fraudulently
induced to part with 500 standards of timber he recovers the
value at the time; it is quite immaterial that he could have
replaced the timber—say, from the Russian market—at a
small portion of the value. If he manufactures for 1d. articles
which can sell for 6d., the measure of damages against the
wrongdoer is 6d., not ld. So if he was by fraud induced to
promise to deliver 500 of the 6d. articles so that the contract
could be enforced by an innocent holder of the contract, it
appears to me that on well established authority the damages
would be 121. 10s., not 21. 1s. 8d. This means that, whether
he parts with goods or parts with an obligation, the measure
of damages is the market value of what he parts with, which
means what it will exchange for; and this necessarily means
in the case of an obligation expressed in currency of the
country the face value of the obligation. If he incurs an
obligation to pay pounds sterling, you do not inquire at what
cost he will acquire the pounds sterling necessary to fulfil
the obligation; he may get them by getting some one to
produce an article at much less cost which he can sell for the
equivalent sterling; he may get them from a benevolent
uncle or from some one who for a small premium has under-
taken to make good his loss. Whatever the liability incurred,
the measure of damages is market value, which in the case of
an obligation to pay currency is face value. Some confusion
has been introduced into the discussion by considering the
question as though the Bank had "lost" the bank notes.
If the notes had been "lost'"' before the Bank had made
them the Bank's contractual obligation by delivery the
proposition of the defendants would be correct. The notes
in such a case are nothing but a collection of bill stamps
completed, but not delivered; to destroy them would but
have the same result as burning a man's cheque book whether
the cheques were filled up and signed or not. I doubt myself
whether Reason 16 of the Bank's case ever meant to contend
anything so unsound as is suggested; it was probably meant
to be read together with the rest of the reasons. But I am

A. C. AND PRIVY COUNCIL.

quite satisfied that such a fallacy never entered into the head
of such an experienced lawyer as Wright J. Throughout his
judgment he is speaking of the liability of the Bank on the
notes, and he finishes his judgment on this point by these
words: '' They say they were damaged by having to assume
liability on these notes without getting anything in return. I
think this argument is correct, and I think these notes must
be taken for this purpose at their face value just as they
would be if they had been issued by some other institution
that is not a bank of issue." I have already stated my
grounds for believing this statement to be correct. For my
part I cannot see the way to decide this case for Messrs.
Waterlow without reversing a number of authorities which
have governed our commercial law, as I understand it, from
earliest times.

There is one final and conclusive proof of the fallacy of the
defendants' contention to which I have not yet heard any
answer. By issuing a note the Bank provide the holder of it
with a piece of currency which he can bring to the Bank the
next day and compel the Bank to receive in discharge of his
overdraft or in payment under a contract to buy securities
or bullion. By issuing 100 million escudos in notes they
provide the public with the means of coming to the Bank
and depriving it of 100 millions' worth of assets in debts,
securities and gold. I say debts, for even Messrs. Waterlow's
contention does not suggest that a debt payable in paper
currency is worth nothing, or that if the debtor is solvent
it is not worth its face value. If the Bank releases a debt of
500 escudos it loses 500 escudos. If it parts with 500 escudos'
worth of gold it loses 500 escudos ;+ but if it issues for nothing
a 500 escudo note to-day by the return of which to-morrow
the debt of 500 escudos is discharged or the 500 escudos'
worth of gold is bought and paid for it loses nothing. I
refuse to proclaim to business men in this country or abroad
that our law is so unreasonable. It is with respect no answer
to say that when the note is returned it can be used again
for value. In fact, strictly speaking, it is not available; the
note when returned is discharged, and the reissue of it

491

H. L. (E.)
1932

a
BANCO DE
PoRTUGAL

v.

WATERLOW

& Sons, Lp.
WATERLOW

& Sons, Lp.

v.
BANCO DE
PORTUGAL.

Lord Atkin.

492

H. L. (E.)
1932

ed
BANCO DE
PORTUGAL
v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
BANCO DE
PORTUGAL.
Lord Atkin.

HOUSE OF LORDS [1932}

creates a fresh obligation ; but the answer to that suggestion
is that notes issued for value can also, when returned, be
reissued ; so that the contention again amounts to this,
that — note + value = — note, a proposition which I do not
wish to qualify with an epithet.

On the general question as to the number of notes in respect
of which damages are to be claimed which turns upon the
day upon which it could be said that the Bank no longer
reasonably could continue to pay good notes for bad, I agree
entirely with the view expressed by Scrutton L.J. I put the
question in that form, for it was conceded at the bar that
at any rate there were some days at the beginning in which
the Bank's action was reasonable and was the natural result.
of the defendants' default. Without such a concession I
think the views expressed by all the judges below correct om
this point. The majority of the Court of Appeal limited the
damages by fixing on December 10 as the day upon which
the Bank could have obtained full information if they had
acted reasonably. I cannot agree with this. It seems to
me disproved by the fact that Messrs. Waterlow, though
on December 9 they had reason to suspect the Marang
transaction, did not in fact give the necessary information
on that day or the 10th, though they were in fact writing to
the Bank on that day; in fact, they never imparted the
relevant information at all except in a deposition to the police
magistrate. J also think that the trial judge, with whose
admirable judgment I agree on almost every other point,
took too early a date for closing the transaction. It seems to
me that once the exchange began it had to continue until
the end of the period fixed by the Bank in conjunction with
the Government, which is December 26. On the whole I
think that notes exchanged after that date must be treated
as benevolences by the Bank.

It only remains to consider how far the damages are to be
reduced by the sum recovered from the actual conspirators,
a sum of about 400,000). Wright J. has apportioned this sum
over the total loss of the Bank, thus reducing proportionately
so much of the total loss as has been recovered from Messrs.

A. C. AND PRIVY COUNCIL.

Waterlow. This seems to me to be incorrect in principle.
The Bank's claim against Messrs. Waterlow would be say
1,000,000/., but they cannot recover more from the defendants
than their nett total loss. This is to be ascertained by taking
the total amount of their loss, not merely that part of it
which is recoverable from Messrs. Waterlow, and deducting
from the total the amount recovered elsewhere. This is the
principle laid down in The Blackcock (1), where a ship was
injured by the negligence of both tug and tow. The owners
recovered judgment for the full amount of the damage from
the tow, but only obtained a sum of 850/. from the proceeds
of the judgment: they then proceeded against the tug and
it was found that both were to blame ; the plaintiffs therefore
were only entitled to half their damage, about 2000]. But
it was held that the defendant was not entitled to credit for
either the whole or a proportionate part of the 850l., for the
two sums together did not make up the total loss. The
decision seems to fit this case exactly, and I think is rightly
decided. The result is that the Bank's total loss on
209,718 false escudo notes paid by the Bank at the agreed
rate of exchange is . = : . £1,092,281
To this must be added the sat of the genuine
notes printed by Waterlows and _ rendered

valueless ; : ; : ; . : 6,541
1,098,822

The total amount recovered from the conspirators
is agreed at : : ; § ; ; 488,430
The Bank's nett loss is therefore : ; £610,392

The actual notes paid up to December 26 exceed 200,000,
so that the total claim against the defendants without any
credit far exceeds 610,392/. The result is, after being given
credit against the total loss suffered by the Bank, the plaintiffs
are entitled to judgment for 610,3921. In my opinion,
therefore, the appeal of the Bank should be allowed, and the
judgment of the Court of Appeal should be set aside, the

judgment directed by Wright J. to be entered for the plaintifis
(1) [1900] P. 1.

493

H. L. (E.)
1932

=
BANCO DE
PoRTUGAL
vw.
WATERLOW
& Sons, Lp.

WATERLOW
& se : Lp.
Bigoo DE
PORTUGAL.

Lord Atkin.

494

H. L. (E.)

1932
ww
BANCO DE
PoRTUGAL
v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
BANCO DE
PoRTUGAL.

HOUSE OF LORDS [1932]

should be varied by increasing the sum there mentioned to
610,392/., and the plaintiffs should have the costs here and
in both Courts below. The appeal of the defendants should
be dismissed with costs here and in the Court of Appeal.

Lorp RusseLt or Kittowren. My Lords, both in the
Court of Appeal and in this House, Messrs. Waterlow admitted
that their contract with the Bank of Portugal contained an
implied term that they would not print or deliver Bank of
Portugal bank notes without the authority of that Bank,
that in printing and delivering the notes to Marang they
had committed a breach of that term, and that they were
liable to the Bank in damages for that breach. The case was
still further narrowed here, because the Bank based their
claim to damages solely upon breach of contract. The
arguments related only to the amount of such damages ;
other matters which have at one time figured in the case,
such as conversion, negligence and passing off, may be
disregarded.

The case divides itself into two very distinct branches—
namely: (1.) consideration of the question whether the
Bank have proved that Messrs. Waterlow's breach of contract
has caused them damage beyond a certain sum of 89221. ;
and (2.) consideration of the conduct of the Bank in treating
Marang notes as if they were authorized notes, particularly
in relation to the question whether any date can be fixed on
or after which the Bank could no longer so act at the expense
of Messrs. Waterlow.

The sum of 8922/. above mentioned represents the cost of
printing (a) the genuine notes which were withdrawn from
circulation, and (b) the notes which were given in exchange
for Marang notes. This damage, it is admitted, the Bank
suffered. To that extent damage, as a result of Méssrs.
Waterlow's breach of contract, was proved.

I will start with the first branch, which raises a problem
both novel and difficult.

The Bank's claim is simply this: That having given
209,718 good notes in exchange for mere bits of paper, they

A. C. AND PRIVY COUNCIL.

have lost the face value of each note so given in exchange.
The loss of 500 escudos is, according to the Bank, the
inevitable consequence of the gift of the note. The language
in which this loss is expressed varies at times. In para. 31
of the Bank's case here it is stated that: '' The Bank claim
the value of the escudos which they had to part with for
nothing." In para. 39 they say: ''The Bank paid out
104,859,000 escudos in exchange for unauthorised notes.
At .... the then rate of exchange the sterling equivalent of
this sum is 1,092,2811." They treat the matter as though,
being the owners of assets worth over a million sterling, they
had parted with those assets (or had incurred an immediate
liability to part with assets of that value) receiving nothing in
return. Therefore they claim that they did in December,
1925, suffer, and have now suffered, damage to that amount.

Wright J. accepted this view. As I read his judgment he
treated bank notes while in the hands of the Bank as of the
same value as in the hands of any other person, and held
that the Bank therefore lost that value when they issued a
note in exchange for a Marang note. The pith of his
judgment upon this point is contained in five lines in which
he says: " They say they are damaged by having to assume
liability on those notes without getting anything in return.
I think this argument is correct, and I think these notes
must be taken for this purpose at their face value just as they
would be if they had been issued by some other institution
that is not a bank of issue." Those five lines are the basis of

495

H. L. (E.)
1932

——
BANCO DE
PoRTUGAL

v.
WATERLOW

& Sons, Lp.

WATERLOW
& Sons, Lp,
Vv

BANCO DE
PoRTUGAL.
Lord Russell
of Killowen.

his judgment on this head, and are re-echoed in the sixteenth -

reason of the Bank's case here—namely: " Because the
Bank's notes being the currency of the country have the same
value in their hands as in those of third parties."

Greer L.J. says: '' Every time they issued good notes to
the value of 500 escudos in place of worthless notes, they lost
the market value of 500 escudos." In another passage he
phrases it thus: "In my judgment the Bank are entitled to
say to the defendants, ' By your wrong I lost a certain number
of escudos worth x pounds, give them back to me in English
money at the rate of exchange at the date of my loss.'"

A et ee

496

H. L. (E.)
1932

a
BANCO DE
PoRTUGAL
v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.
v

BANCO DE
PORTUGAL.

Lord Russell
of Killowen.

HOUSE OF LORDS [19382]

And the Lord Justice makes this additional statement : " If
my purse containing 51. is stolen I do not recoup my loss
because I have an unused balance in my bank out of which
I can draw by cheque another 5/1. The damage I have suffered
is still 5J., not merely the 2d. I have to pay for the cheque
form." Here again is Reason No. 16.

Slesser L.J. seems to rest his judgment on the question
whether the Bank had established damage beyond cost of
printing, upon a twofold basis. His language is as follows:
"' Now in the case of the issue to cover the exchange of the
Marang notes, the Bank received nothing in respect of this
issue. To all intents and purposes it gave away 209,000 odd
notes, worth on the exchange about 5/. each, receiving nothing
in exchange; and I cannot see in these circumstances—the
notes of Portugal being currency within that country and
exchangeable as we are told at 96 escudos to the £ in London
—why the Bank cannot say that by being compelled to issue
this currency for no value, and thus proportionately to deplete
their further power to issue, they have suffered damage to
the extent of this value of the notes."

All three judgments are founded upon this view: That the
Bank in December, 1925, suffered damage to the extent of
over a million pounds sterling, by having in that month paid
away 104,859,000 escudos.

If this view correctly represents the position, then the
Bank would on the giving of each good note in exchange for
a bad note become in fact poorer by the face value of the
good note, and there could be no doubt that damage to that
amount had been sustained by the Bank. But in my opinion
this view does not represent the facts, but overlooks the
exceptional situation which arises when a bank of issue issues
notes constituting an inconvertible currency.

It is necessary to state a few facts as they existed in
December, 1925, in order to appreciate the situation at that
time.

The Bank were a Portuguese Joint Stock Company which
acted as bankers to the Portuguese Government, and which
ever since 1887 had enjoyed an exclusive licence to issue

A. C. AND PRIVY COUNCIL.

their own notes as the only legal currency in Portugal. The
capital of the Bank was 13,500,000 escudos in fully paid shares
with limited liability. There were two species of issue and of
notes in circulation—namely, one destined for the banking
operations of the Bank, the other applied as loans to the
Treasury. The limit of the right of issue for banking operations
was between 195 and 196 million escudos; notes for this
purpose had in fact been issued to an amount between
64 and 65 million escudos, leaving an unexhausted power of
issue to an amount of about 131 million escudos. Notes
issued on Government account amounted to 1640 million
escudos, so that the total issue of authorized notes amounted
in December, 1925, to a face value of 1704 million escudos
or thereabouts. The loans to the Government bore interest
only at 1 per cent. per annum, of which five-eighths fell to a
sinking fund. None of the Bank's notes were payable or
redeemable in gold or silver. <A period of inconvertibility had
been established in 1891 and was still continuing, with no
likelihood of its ever being determined. The only liability of
the Bank, so far as concerns paying or redeeming a note when
presented at the Bank, was to give in exchange for it another
note or notes of equivalent face value. Each note when
issued by the Bank became in the hands of the holder legal
tender, and any such note if paid to the Bank by a debtor
to the Bank must be accepted by the Bank in discharge pro
tanto of the debt.

That being the condition of affairs, when the Bank gave a
good unissued note in exchange for a Marang note did they
become poorer to the amount of 500 escudos either by parting
with 500 escudos or by incurring an immediate liability to
part with 500 escudos ? That appears to me to be the crucial
question; and the answer seems to me to depend upon a
correct appreciation of what happened when the Bank
issued the good note to the holder of a Marang note, and a
correct statement of the obligations which the Bank assumed
by the issue of that good note.

As already pointed out, Wright J. and Greer and Slesser L.JJ.
were of opinion that the Bank in issuing the note were parting

A. C. 1932. 3 2M

497

H. L. (E.)

1932
—_
BANCO DE
PoRTUGAL

v.

WATERLOW

& Sons, Lp.

WaTERLOW

& Sons, Lp,
Vv

BANCO DE
PORTUGAL,

Lord Russell
of Killowen .

498

H. L. (E.)

1932
—~
BANCO DE
PORTUGAL
v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.
Vv

BANCO DE
PORTUGAL.

Lord Russell
ef Killowen.

HOUSE OF LORDS [1932]

with 500 escudos. It is true that Wright J. also refers to
the Bank assuming a liability in issuing the note, but I think
he bases his judgment on the former view, for he expressly
treats the case as if it were just the same as a case where a
bank has been deprived of a note issued by some other
authority.

In my opinion the Bank parted with no escudos. They
issued something which in the hands of the recipient was
currency of Portugal and legal tender for payment of
indebtedness up to 500 escudos, the form of that currency
being, not any metal or other substance of value, but a piece
of paper by virtue of which an obligation was incurred by
the Bank to the holder thereof. While that something was in
the possession of the Bank it could have no value assigned
to it, for an obligation by one to himself is nothing worth.
The value attaches to the note when it is issued to the holder ;
but the value does not quit the Bank, and leave the Bank so
much poorer. The value attaches to the note when the
Bank issue it, and thereby undertake an obligation to the
holder. The Bank are affected not by the parting with
anything which they possessed but by the incurring of an
obligation.

My Lords, that in my opinion is an accurate statement
and a complete statement of what happened when the Bank
issued a good note to the holder of a Marang note. If that
be so then it must follow that the judgments below cannot
stand, in so far as they are based upon the view that the
Bank parted with or lost escudos to the amount of the face
value of the good notes which were given in exchange for
Marang notes. In truth this view was the outcome of the
erroneous belief that there was no distinction to be drawn
between a note of the Bank of Portugal in the possession of
that Bank, and the same note in the possession of another
bank or individual; a belief which in terms emerges in the
judgments of Wright J. and Greer L.J. and which underlies
the Bank's 16th reason.

This belief is clearly ill founded. This was indeed admitted
in your Lordships' House; and the Bank's argument

A. C. AND PRIVY COUNCIL.

proceeded upon the footing that by reason of the obligation
incurred by the Bank in issuing a good note and of the fact
that they had received nothing in return, they had necessarily
suffered damage to the extent of the face value of the note.
I say "necessarily," for the Bank made no attempt to prove
this by evidence. It must, if the Bank are to succeed, be a
case of the thing speaking for itself. I have to deal with this
in some little detail, because it appears to me that with the
disappearance of Reason 16, there disappeared also the
Bank's only basis for claiming the face value of the notes,
without giving affirmative evidence of the damage which they
had sustained.

What then was the obligation which the Bank incurred 2

Mr. Gavin Simonds, in the course of an admirable
argument which leaves me much in his debt, defined this
obligation with I think complete accuracy. It is threefold
—namely: (1.) To give in exchange a note or notes of
equivalent face value each carrying a similar obligation.
(2.) If and when it is hereafter decreed that the notes are to
be redeemed in gold, then on demand such quantity of gold
as may be decreed. (3.) If and when it is hereafter decreed
that some new form of currency shall be legal tender, and that
the Bank's notes are to be paid in such currency, then on
demand to pay the proper amount of such currency.

The problem then is to quantify those obligations in terms
of money. What is the sum which will compensate the Bank
for being forced to undertake those obligations ? How much
worse off is the Bank likely to be by having to fulfil them ?

To say that by having to fulfil them the Bank will necessarily
be worse off by the face value of each note given in exchange
for a Marang note seems to me, with all respect to those who
think otherwise, manifestly impossible. Such a conclusion
should surely be based upon some evidence. Could any
evidence hope to establish it? For myself I can see no
such possibility. The first obligation carries no loss to the
Bank except the cost of providing the new note. The second
obligation is so far removed from actuality that both the

Courts below treat it as a nominal matter. The third
; 3 WD

499

H. L. (E.)
1932

=
BANCO DE
PoRTUGAL
v.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v.
BANCO DE
PORTUGAL.

Lord Russell
of Killowen.

500

H. L. (E.)
1932

BANCO DE
PoRTUGAL
v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
BANCO DE
PORTUGAL.

Lord. Russell
of Killowen.

HOUSE OF LORDS [1932]

obligation is purely contingent and even hypothetical. But
let me again remind the House that even if some appreciable
degree of damage could arise to the Bank by the assumption
of this threefold obligation, it was incumbent on the Bank to
prove it. This task they never attempted.

It was, however, argued that damage had accrued to the
Bank in other ways by reason of their having been forced
to issue notes, getting nothing in return.

It was said that the Bank had assumed an eerie
getting nothing in return. That is true. It was then said
that the value of that obligation was the value of the note in
the market—namely, 500 escudos. The same argument
assumed another form—namely, that the sum in sterling
which the Bank claimed to recover from Messrs. Waterlow
was the exact amount which it would have cost Messrs.
Waterlow at the relevant date to purchase 209,718 notes in
order that the Bank's liability thereon might be cancelled.
When the value of the obligation is alleged to be value of the
note, that can only mean that that is the value to the note-
holder of the fulfilment by the Bank of their obligation. It
by no means follows that 500 escudos represents the cost to
the Bank of that fulfilment. But in assessing damages for a
breach of contract the question is not what sum will it cost
the defendant to repair his breach, but what loss has the
plaintiff sustained by reason of the defendant's breach. In
many cases, possibly in most cases, the answer to each
question would be the same sum. It would be the same
here if Reason No. 16 were true, and if the Bank had really
parted with 500 escudos with each note issued in exchange
for a Marang note.

Further, it was argued that in respect of each note so issued
the Bank had lost the consideration which they would have
received if they had issued the note for the purposes of their
banking business. There is no ground for assuming that all
or indeed any of the notes would have been issued for this
purpose rather than for Government purposes. Assuming,
however, this fact in the Bank's favour, this argument as it
appears to me adds nothing. It only means that the Bank

A. C. AND PRIVY COUNCIL.

have assumed a liability without receiving any consideration.
The true question still remains; what damage have they
suffered by assuming the liability which each issue involves ?

Another argument centred in the allegation that each note
issued in exchange for a Marang note, being legal currency,
could be applied by the holder and must be accepted by the
Bank in payment of a debt due to the Bank, although at
the time of its issue nothing had been received by the Bank.
True; but this consideration will not per se justify the view
that the Bank must necessarily be worse off by the face
value of every note so issued; for who can say that all or
any or how many notes so issued, will be so applied? The
Bank are affected once and for all by the fact, and only by
the fact, that at the moment of issue of the note in exchange
for the Marang note they assumed the threefold obligation
described above; and we come back always to the same
question: What sum represents the damage suffered by the
Bank in December, 1925, when they assumed that obligation ?

Finally, it was urged that if and when the Bank went into
liquidation, and the assets of the Bank were realized and
applied in payment of their creditors, the increased liability
assumed in December, 1925, would necessarily occasion a
diminution of the surplus (if any) available for the share-
holders. This indeed was the argument of Dr. Ulrich in
the witness box. Few events are less likely to happen; but
if this event ever did happen as described, and the creditors
were paid in full, the shareholders would not necessarily
suffer a loss. For according to one theory with the increase
of the number of escudos in circulation there "follows an
automatic decrease in the value of escudos and an automatic
increase in the value of assets measured in terms of escudos.
But though this argument might be advanced in support
of a claim to some damage beyond the cost of printing, it
appears to me to be of no assistance towards establishing the
Bank's proposition that the measure of their present damages
must be the face value of the notes.

When all is said and done the position is this. The Bank
make no claim based on curtailment of their powers of issue,

501

H. L. (E.)
1932

—"——
BANCO DE
PORTUGAL

v.

WATERLOW

& Sons, Lp.

WATERLOW
& Sons, Lp.
Vv

BANCO DE
PORTUGAL,
Lord Russell
of Killowen,

502

H. L. (E.)

1932
—~
Banco DE
PoRTUGAL
v.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v

BANCO DE
PORTUGAL.

Lord Russell
of Killowen.

HOUSE OF LORDS [1932]

or based on loss of profitable business. They make no claim
for damages resulting from the introduction of 209,718 Marang
notes into the existing currency of 1704 million escudos.
They make one claim only—namely, that every time they
issued a good note in exchange for a Marang note they suffered
damage to the extent of 500 escudos. In support of that
claim they offered no evidence ; they pinned their faith to
the proposition contained in the 16th Reason. When that
is shown to be false, nothing remains to support their claim.

One of your Lordships in his speech has, in effect, accused
those of us who differ from him in this case, of upsetting a
number of authorities governing our commercial law.
Personally, I am unconscious of any such assault upon
authority. I am only conscious of deciding that the Bank
have not proved that they have suffered the enormous damages
which they claim to recover from Messrs. Waterlow. I
confess, however, that 1 derive some consolation from the
knowledge that, in this alleged act of violence I am abetted
by one whose pre-eminence as a commercial lawyer is both
well established and long established.

Upon this part of the case I am in agreement with the
view expressed by Scrutton L.J.—namely, that the judg-
ment of Wright J. should be set aside and judgment entered
for the Bank for the sum of 89221. I would accordingly allow
the appeal of Messrs. Waterlow and dismiss the Bank's appeal.

A majority of your Lordships, however, think otherwise,
and are of opinion that the Bank have proved that in issuing
a good note in exchange for a Marang note they suffered
immediate damage to the amount of 500 escudos. Messrs.
Waterlow upon that footing are prima facie liable to the
Bank in the sum of 104,859,000 escudos or (converted into
sterling at the appropriate rate and date) 1,092,281]. This
indeed would appear to be something in the nature of a
windfall for the Bank; for the introduction into a total
issue of 1704 million escudos of less than 105 million bastard
escudos will have resulted in the Bank recovering a sum
amounting to more than seven times their paid up share
capital.

A. C. AND PRIVY COUNCIL.

There remains the question whether in the circumstances
of this case a date can be fixed by reference to which the
Bank were not entitled to charge Messrs. Waterlow with the
damage sustained by reason of the exchange of good notes
for Marang notes subsequently thereto.

Wright J. fixed such a date as December 16, 1925. Greer
and Slesser L.JJ. fixed it as December 10, 1925. Scrutton L.J.
fixed it as December 26, 1925, being the date which by the
Bank's public notice, issued in concert with the Government,
was fixed as the last day on which Vasco da Gama 500 escudos
notes would be exchanged.

Upon this part of the case I do not intend to trouble the
House. At this point my dissent comes to an end, and we
all find ourselves in agreement with Scrutton L.J.

The circumstances of this case are very exceptional. The
forged notes only fail to be real because their printing was
unauthorized. They were printed from the Bank's own
plates. Long before there was any possibility of detection
they had been circulating in large quantities. Numbers of
them may have obtained the status of validity by having
been received and reissued by the Bank and its numerous
branches. There was no possibility of ascertaining which
Marang notes had in this way acquired enforceable rights.
This feature. of reissue strikes me as being of overriding
importance.

In these circumstances I am of opinion that it cannot be
effectively contended either that the Bank should not (down
to and including December 26, 1925) have honoured all
Marang notes, or that such damages as flowed from that
course of action are not damages which fall within the test
of Hadley v. Baxendale (1), and for which Messrs. Waterlow
are liable.

Lorp Macmitytan. My Lords, there is already on record
in the admirable judgment of Wright J. an adequate
account of the fraud perpetrated by Marang and his fellow
conspirators on Messrs. Waterlow & Sons and the Bank

(1) 9 Ex. 341.

503

H. L. (E.)
1932

—_
BANCO DE
PORTUGAL

Vv.
WATERLOW
& Sons, Lp.
WATERLOW
& Sons, Lp.

v

BANCO DE
PORTUGAL.

Lord Russell
of Killowen.

504

H. L. (E.)
1932
Ww

Banco DE

PORTUGAL

v.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
'BANCO DE
PORTUGAL.

Lord
Macmillan.

HOUSE OF LORDS [1932]

of Portugal. It is therefore unnecessary to detain your
Lordships by recounting afresh the dramatic circumstances
of a crime for which in the ingenuity and audacity of its
conception and execution it would be difficult to find a
parallel. The present appeals are concerned with the civil
consequences of that crime, and in particular with the estima-
tion and attribution of the loss which it has occasioned.

As regards Messrs. Waterlow & Sons, the result of the
fraud practised upon them was to cause them, without the
authority of the Bank, to print 580,000 Bank of Portugal
notes of 500 escudos each of the Vasco da Gama type from
the plates which were in their possession as the Bank's
printers and to place these unauthorized notes at the disposal
of the conspirators. As regards the Bank, the result of the
fraud was the debasing of the currency of Portugal, for the
validity of which the Bank as the central bank of issue of
the country was responsible, by the introduction into it by
the conspirators of a large number of these spurious notes.

It was conceded by Messrs. Waterlow that it was an
implied term of the contractual relationship subsisting
between the Bank and themselves that they should not
print notes from the plates in their possession except on the
direct orders of the Bank. As they in fact printed and
delivered 580,000 notes to the conspirators without any
order from the Bank, there can be no question, and it was
indeed frankly admitted by Messrs. Waterlow, that their
action in so doing constituted a breach of their duty to the
Bank. For any loss attributable in law to this breach of
duty which the Bank can prove that it has suffered Messrs.
Waterlow admit liability. The debate at your Lordships'
bar consequently centred round the problem: What loss
for which Messrs. Waterlow are legally responsible has the
Bank of Portugal sustained by reason of the unauthorized
printing and introduction into the currency of Portugal of
the spurious notes in question 2

Now it was admitted that the Bank on discovering that a
large number of spurious notes had been surreptitiously
introduced into the currency of Portugal was not only

A. C. AND PRIVY COUNCIL. 505

entitled but bound in its own and the public interest to H. L. (E.)
adopt remedial measures for the protection of the currency. 1932

The step which it took was to publish at once a notice in- Banco vz
timating that it had resolved to withdraw from circulation SEoEeeey

v.
the entire vitiated issue of 500 escudo Vasco da Gama notes pips |

& Sons, Lp.
in the hands of the public and on their presentation at the warnrrow
head office or branches of the Bank to give other notes in a toa 2 ae 3
exchange for them. In pursuance of this notification the Banco DE
Bank honoured all the 500 escudo Vasco da Gama notes Sao
which were presented to it for exchange, spurious and genuine Macrallan,
alike. That the withdrawal of the whole issue was a reason- _
able and indeed the only practicable step for the Bank to
take in order to remedy the situation which had arisen was
hardly contested by Messrs. Waterlow. They directed their
criticism rather to the way in which the Bank carried out
its policy. In the first place they argued that the Bank
acted precipitately, and that if it had delayed the announce-
ment of the withdrawal of the notes for a short time the
means of discriminating between the spurious and the genuine
notes, which admittedly the Bank did not at first possess,
would have been available to it and it could have refused
to honour the notes ascertained to be spurious. In the
next place they argued that if the Bank had at first no alter-
native but to honour spurious and genuine notes alike by
reason of its inability to distinguish between them it should
have ceased to honour the spurious notes whenever it had
acquired or could have acquired the means of discrimination.

Neither of these criticisms of the Bank's action is in my
opinion warranted. The Bank in my view was justified in
taking immediate action when it did, for the fact of the
existence in the currency of a large number of spurious notes
became a matter of public knowledge almost simultaneously
with its discovery by the Bank, and if a panic was to be
averted it was essential to take action at once. I equally
think that having properly announced the withdrawal of the
notes and its intention to honour all such notes in the hands
of the public, it was not possible for the Bank to alter its
policy until a reasonable time had been given to the public

506
H. L. (E.)

1932

——_
BANCO DE
PORTUGAL

v.

WAaATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.
v

BANCO DE
PORTUGAL.
Lord
Macmillan.

HOUSE OF LORDS [1932}

to effect the exchange. To have honoured the spurious
notes so long as it could not tell them from the genuine notes
and then to cease to honour them when it acquired the
means of discrimination would have created a second
panic, and such a course of conduct on the part of the
Bank would have been grossly unfair. If the only way
to avoid a panic was to honour good and bad notes
alike, as I think in the circumstances it was, the Bank's
ability to distinguish between them becomes an irrelevant
consideration. Moreover the Bank was quite unable to
say with regard to any particular spurious note presented
to it whether it had not itself unwittingly reissued it into
circulation and so become responsible for it.

I confess I am not disposed to regard with much sympathy
the criticism which Messrs. Waterlow have directed at the
Bank's action. Where the sufferer from a breach of contract
finds himself in consequence of that breach placed in a position
of embarrassment the measures which he may be driven to
adopt in order to extricate himself ought not to be weighed
in nice scales at the instance of the party whose breach of
contract has occasioned the difficulty. It is often easy
after an emergency has passed to criticize the steps which
have been taken to meet it, but such criticism does not come
well from those who have themselves created the emergency.
The law is satisfied if the party placed in a difficult situation
by reason of the breach of a duty owed to him has acted
reasonably in the adoption of remedial measures, and he will
not be held disentitled to recover the cost of such measures
merely because the party in breach can suggest that other
measures less burdensome to him might have been taken.
On this part of the case I find myself in agreement with the
reasoning of Scrutton L.J. In my opinion the action of the

- Bank in honouring all notes of the type in question, genuine

and spurious alike, between December 7 and December 26,
1925, was reasonable and justifiable in the circumstances,
and Messrs. Waterlow ought to be held responsible for
whatever loss was occasioned to the Bank by the adoption
of that policy. I have taken December 26 as the limiting

A. C. AND PRIVY COUNCIL.

date, for that was the date which the Bank itself fixed, and
I think that it was proper to specify a time-limit for the
presentation and exchange of the notes. In so far as the
Bank voluntarily continued to honour notes presented after
December 26 I am of opinion that it should not be allowed
to lay the cost of doing so to the charge of Messrs. Waterlow.

The problem thus now narrows itself to the ascertainment
of the loss which the Bank incurred by reason of its having
honoured spurious 500 escudo notes of the Vasco da Gama
type between December 7 and December 26, 1925.

In all 799,190 of the notes, including both the genuine
and the spurious ones, were withdrawn from circulation.
This figure includes those withdrawn after December 26.
Of the 799,190 notes it has been ascertained that 209,718 or
26°241 per cent. were spurious. Up to December 26, the total
number withdrawn was 791,533. If the percentage of
26°241 be applied to this figure the result is that between
December 7 and December 26 207,706 may be taken as the
number of spurious notes which the Bank honoured between
these dates. Consequently the loss which the Bank is entitled
to attribute to Messrs. Waterlow's breach of contract is the
loss which it incurred by issuing good notes in exchange for
207,706 spurious notes. That is the measure in law of the
liability of Messrs. Waterlow to the Bank.

The problem of assessing this loss necessitates an excursion
into the controversial region of banking finance. What the
Bank actually did was to give good and valid notes in
exchange for entirely worthless notes. What loss did this
occasion to the Bank ? On the one hand it is submitted that
all that the Bank lost was the negligible cost in paper and
printing of the good notes which it gave in exchange for the
spurious notes. On the other hand it is submitted that the
Bank lost the full face value of these good notes so given in
exchange.

Your Lordships were presented with a choice between
these two extremes. No possible middle course was suggested.
Which is right ? If neither were held to be right the action
would have to be dismissed, for neither evidence nor argument

acta,

>

507

H. L. (E.)
1932

es,
BANCO DE
PORTUGAL
v
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v.
BANCO DE
PORTUGAL.

Lord
Macmillan.

508

HPL.1(E)

1932
——
BANCO DE
PoRTUGAL
Vv.
WATERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.
v.

BANCO DE
PORTUGAL.

Lord
Macmillan.

HOUSE OF LORDS [1932]

was adduced in support of any alternative other than the
two I have stated.

The argument which was presented with admirable lucidity
and much cogency by Mr. Gavin Simonds on behalf of
Messrs. Waterlow and which prevailed with Scrutton L.J. in
the Court of Appeal and has also prevailed with two of your
Lordships, is certainly attractive. The Bank of Portugal,
so runs the argument, is a bank of issue, that is to say, it
can create and issue notes at its discretion up to the maximum
which the law of Portugal, embodied in appropriate ordinances,
permits. It costs the Bank nothing to create and issue its
notes beyond the cost of the paper and printing. True,
when the Bank issues one of its notes it incurs an obligation
to the holder of it. But inasmuch as the paper currency of
Portugal is not convertible, or, in other words, does not
entitle the holder to claim payment of its face value from the
Bank in gold at a fixed rate, the only obligation which the
Bank incurs when it issues a note is to give on demand another
note in exchange for it. Thus the Bank can always honour
its obligation to the holders of its notes at the trivial cost
of printing new notes. A promissory note which is perpetually
renewable has theoretically no value, because it is never
payable. The Bank has consequently only sacrificed some
stationery.

In my opinion this argument is fallacious. It overlooks
the cardinal fact that a note when issued by the Bank of
Portugal becomes by the mere fact of its issue legal tender for
the sum which it bears on its face. The issued note represents
so much purchasing power in terms of commodities. It can
be used by the holder of it to purchase at current prices any
commodity in the market, including gold and securities. It

'can equally be used by the Bank to purchase commodities,

including gold and securities, or to discharge debts due by
it. It must be accepted by the Bank in discharge of debts
due to it. All this is quite irrespective of the convertibility
of the note. With all respect to the contrary view it is in
my opinion quite an irrelevant circumstance for the present
purpose that the holder of a Bank of Portugal note is not

A. C. AND PRIVY COUNCIL.

entitled to demand for it from the Bank a fixed amount of
gold. Gold after all is only a medium of exchange. Its
special importance as such arises from its universal
acceptability and the stability of its value. A bank of issue
which undertakes to pay its notes in gold undertakes to give
in exchange for them a commodity of universally recognized
value, and therefore a paper currency backed by gold possesses
a high value in exchange ; it is in effect as good as gold. On
the other hand a paper currency which the bank issuing it
does not undertake to pay in gold has necessarily a lower
value in exchange; its purchasing power is not measurable
in terms of a universally accepted standard, but depends on
the credit of the issuing bank. In the present case the low
value in exchange of the 500 escudo note of the Bank of
Portugal reflects its inconvertibility ; its purchasing power
is correspondingly diminished. The Bank gets less value for
the notes which it issues than it would get if they were
convertible in gold.

In the course of the debate Mr. Simonds in answer to a
question from me admitted that if the notes of the Bank had
been payable in gold the liability of his clients would have
been measurable in terms of their face value. This admission
in my view was really inconsistent with his argument, which,
whether it be well founded or not, seems to me to be unaffected
by the convertibility or inconvertibility of the notes. Whether
its notes are convertible or not a bank of issue in issuing them
incurs only the cost of paper and printing; the difference
consists in the purchasing power which they represent
according as they are the equivalent of so much gold, i.e., of
a universally acceptable medium of exchange, or only of so
much of the bank's credit, a particular medium of exchange
whose value may vary between being as good as gold or as
worthless as dross. If the notes of the Bank of Portugal
had been convertible the liability of Messrs. Waterlow would
have been for the value of convertible notes, i.e., for notes
of a higher exchange value, instead of for the value of
inconvertible notes, i.e., for notes of a lower exchange
value.

509

H. L. (E.)
1932

—~
BANCO DE
PorTUGAL

v.
WATERLOW
& Sons, Lp.

WATERLOW
& Sons, Lp.
v

BANCO DE
PORTUGAL.
Lord:
Macmillan.

510

H. L. (E.)
1932

—_
BANCO DE
PoRTUGAL
VU.
WaTERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.
v

BANCO DE
PORTUGAL.

Lord
Macmillan,

HOUSE OF LORDS [19382]

Much stress was laid by Messrs. Waterlow on the fact that
in the Bank's own hands its notes were mere chattels
possessing only the value of the paper and printing, and that
if by a fire in its premises its whole stock of notes were burnt
it would lose no more than their chattel value, whereas if
the Bank's notes were destroyed by fire while in the posses-
sion of a member of the public a loss represented by their
face value would be incurred. That is true, but the argu-
ment disregards again the value of the note-issuing power
of the Bank, which enables it to confer on the paper which
it issues the quality of legal tender, the quality of possessing
purchasing power to the amount indicated on its face. The
Bank only issues notes in exchange for value, and the value
of its notes in turn reflects the value which it receives in
exchange for them. Herein lies the answer to the point
advanced on behalf of Messrs. Waterlow that, inasmuch as
the Bank issues the bulk of its notes on the call of the Govern-
ment on unremunerative terms, it cannot be said that the
Bank if it had itself issued the spurious notes would neces-
sarily have received full value for them; they might have
been included in an unremunerative issue to the Govern-
ment. The answer, it seems to me, is that the circumstance
that a large number of its notes are issued to the Government
in exchange for Government paper on unremunerative terms
has for its result that the assets on which the paper currency
of Portugal is based are by so much the less valuable as a
basis of credit and that the currency has a correspondingly
less value in exchange. Messrs. Waterlow get the benefit
in the depreciated value of the escudos they have to pay.

It remains to notice an ingenious argument that the only
effect of the increase in the currency of Portugal by the
introduction of the spurious notes was to diminish the
value of each unit of the currency and so to increase corre-
spondingly the value in terms of that currency of all the
assets in the country. Thus any loss occasioned to the
Bank by the introduction of the spurious notes would be
compensated by an equivalent appreciation of its assets.
This is said to be the result of what is known as the quantity

A.C. AND PRIVY COUNCIL.

theory of money. I am not concerned to discuss the
validity of this theory. I should doubt if it is applicable
in the case of a surreptitious dose of excess notes and where,
as here, the excess notes as soon as their existence was known
were at once withdrawn; but in any case it is sufficient for
the present purpose to point out that there is no evidence
of any depreciation of the currency having occurred in conse-
quence of the introduction of the spurious notes, and no
evidence of the Bank having been compensated for issuing
gratuitously over two hundred thousand of its notes by an
equivalent appreciation of its assets. This argument, it
may be remarked, would appear to be equally applicable in
the case of a convertible currency.

On the whole matter accordingly I reach the conclusion
that the Bank, being compelled to issue for nothing notes
for which if it had issued them in ordinary course it would
have received value corresponding to the purchasing power
of the number of escudos which they represented, has suffered
loss to the extent of the face value of these notes.

I now proceed to work out the practical result. The
spurious notes honoured by the Bank between December 7
and 26 amounted to 207,706, which at 500 escudos each
gives a total of 103,853,000 escudos, equivalent, at 96 escudos
to the pound sterling, being the agreed current rate of
exchange at the time, to 1,081,802/. To this must be added
65411., being the cost of the genuine notes rendered useless
by their withdrawal from circulation, bringing out the total
liability of Messrs. Waterlow at 1,088,343). The Bank
agreed that a claim of 2381/. which it had originally made
for the cost of the good notes given in exchange for the
spurious ones and which Wright J. took into account could
not receive effect if the Bank was awarded the value of the
spurious notes. For the sum of 1,088,343/. the Bank would
accordingly be entitled to judgment were it not for the fact
that it has already received from the liquidators of the Banco
Angola e Metropole, the organization set up by the con-
spirators for the purpose of utilizing the spurious notes, a
sum equivalent to 413,4301., and have also estimated that

511

H. L. (E.)
1932

"~~
BANCO DE
PORTUGAL

v.
WATERLOW

& Sons, Lp.

WATERLOW
& Sons, Lp.
v.
BANCO DE
PORTUGAL.

Lord
Macmillan,

512

H. L. (E.)
1932

—_w
BANCO DE
PORTUGAL

v.
WATERLOW

& Sons, Lp.

WATERLOW
& Sons, Lp.
v

BANCO DE
PORTUGAL.

——

Lord
Macmillan.

HOUSE OF LORDS [1932]

they will receive from this source a further sum of 75,0001.,
making in all 488,430]. A question has been raised as to
the manner in which credit should be given for this sum.
There are various ways in which it may be treated. (1.) It
may simply be deducted from the sum of 1,088,343/. for
which Messrs. Waterlow are liable, leaving 599,913]. as the
sum for which judgment should be pronounced; (2.) inas-
much as the Bank's total loss (apart from the cost of printing
notes) amounted to 1,092,281/., being the sterling equivalent
of 209,718 spurious notes, and as the 488,430]. represents a
partial recovery against this sum, a proportion of the
488,4301. in the ratio of 207,706 (being the number of spurious
notes in respect of which Messrs. Waterlow have been found
liable) to 209,718 (being the total number of spurious notes
honoured), or in other words 99°04 of the 488,430]. or
483,7411. should be deducted from the sum of 1,088,3431.,
leaving 604,602/. as the sum for which judgment should be
pronounced ; or (3.) the sum of 488,430/. should be deducted
from the Bank's total loss of 1,098,822]. (being the loss on
209,718 spurious notes plus the cost of genuine notes rendered
useless) leaving 610,392/., and as this sum is well within the
total sum of 1,088,343/. for which Messrs. Waterlow are
liable, judgment should be pronounced for 610,392/. Messrs.
Waterlow contend for the first method, Wright J. adopted
the second, and the Bank contend for the third, quoting in
support The Morgengry and The Blackcock.(1) The differ-
ences in result are relatively unimportant in view of the
magnitude of the sums involved and I have found the ques-
tion a troublesome one, but I have come to the conclusion
that the third method is the right one. Having recovered
part of their total loss from the perpetrators of the fraud,
and having established liability for more than the balance
of their total loss against Messrs. Waterlow, the Bank is, in
my view, entitled to avail themselves of Messrs. Waterlow's
liability up to the extent of the balance of their total loss,
and so to secure from the combined sources complete
indemnity.
(1) [1900] P. 1.

A. C. AND PRIVY COUNCIL.

In parting from the case I cannot refrain from observing
that the fact that a sum of nearly half a million pounds has
been recovered by the Bank from the conspirators gives
occasion for a comment on the leading contention of Messrs.
Waterlow that the Bank lost nothing by issuing its good
notes in exchange for spurious ones. The conspirators consti-
tuted themselves an illegal bank of issue for the spurious
notes which cost them nothing but the cost of paper and
printing, yet they seem to have made half a million sterling
and probably much more by the issue of these notes. Why,
it occurs to me to ask, should it be said that the Bank would
not equally have received value in return if it had issued a
corresponding number of genuine notes in ordinary course
and that it has been deprived of nothing by having had to
issue them gratuitously ?

I am accordingly in favour of dismissing Messrs.
Waterlow's appeal, allowing the Bank's appeal, and
directing judgment to be pronounced against Messrs.
Waterlow for the sum of 610,392.

Order of the Court of Appeal reversed and judg-
ment of Wright J. varied by increasing the
sum of five hundred and sixty-nine thousand,
four hundred and _ twenty-one pounds
(569,4211.) to six hundred and ten thousand,
three hundred and ninety-two pounds
(610,3921.), and subject to such variation
restored. Appeal of Waterlow & Sons, Ld.,
dismissed. Waterlow & Sons, Ld., to
pay to Banco de Portugal the costs in the
Court of Appeal and also the costs of the
appeals to this House. Banco de Portugal
to pay to Waterlow & Sons, Ld., the costs
of the petition for leave to adduce further
evidence, such costs to be set off against the
costs ordered to be paid by Waterlow and
Sons, Ld., to Banco de Portugal. Cause
remitted back to the King's Bench Division

A. C. 1932. 3 2N

513

H. L. (E.)
1932

ates
BANCO DE
PORTUGAL
v.
WATERLOW
& Sons, Lp.
WaATERLOW
& Sons, Lp.
»

BANCO DE
PoRTUGAL,.

Lord
Macmillan.

514

H. L. (E.)

1932
—~
Banco DE
PORTUGAL
Vv.
WAaTERLOW

& Sons, Lp.

WATERLOW

& Sons, Lp.

v.
Banoo DE
PortTuGat.

HOUSE OF LORDS [1982]

to do therein as shall be just and consistent
with this judgment.
Lords' Journals, April 28, 1932.