Midland Bank Ltd v Reckitt

Lorp AtxKin. My Lords, this case
arises out of the fraudulent acts of Lord Terrington, who,
in 1922 and during the relevant period, was practising
as a solicitor in Clarges Street in the name of H. J. S.
Woodhouse & Co. He had as a client Sir Harold Reckitt,
now deceased, whose legal representatives are the respond-
ents to the present appeal. Sir Harold Reckitt appears
to have been a wealthy man in the habit of spending part
of his time abroad. He employed Lord Terrington as his
solicitor. In 1915 Sir Harold, being engaged in Red Cross
work in France, gave Lord Terrington, then Mr. Woodhouse,
a power of attorney in limited form which did not include a
power to draw cheques on his account. It was considered
desirable that Lord Terrington should possess this particular
power ; and it was given by a letter dated August 17, 1915,
written by Sir Harold to his bankers, Barclays Bank, at
Hull, empowering Lord Terrington to draw cheques upon the
account at Hull " without restriction."' In 1922 the original
form of power of attorney which had been renewed from
time to time was superseded by an extended form which
expressly gave power to the attorney to draw cheques on the
principal's banking account and to apply moneys for the
purposes of the principal; but it does not appear that the
general terms of the letter of August 17, 1915, were in any
way modified or that Barclays Bank were even informed
of the extended power of attorney. The power of attorney
of 1922 was renewed from time to time and was in force
during all times relevant to this action. Lord Terrington
to Sir Harold Reckitt's knowledge acted under the power
of attorney at all times, whether Sir Harold Reckitt was in
the country or not. Both principal and attorney, therefore,

1932

hots
MIDLAND
BANK
v.
RECKITT.

9

10 HOUSE OF LORDS [1933]

H. L. (E.) drew upon Barclays account at Hull, a great number of
1932 cheques being drawn in the ordinary course by each of them.
Miptann Lord Terrington drew cheques on cheque books supplied by
on Barclays Bank at the cost of the principal, signing the cheques
— on an impression made by a rubber stamp containing in the
Yord Atkin. upper line "Harold G. Reckitt by" and on the lower line "his
attorney ' and placing his own signature between the lines,
so that the completed signature on each cheque ran

" Harold G. Reckitt by Terrington, his attorney."

In 1926 it was discovered that Lord Terrington had been
in the habit of fraudulently drawing cheques for his own
purposes on Sir Harold Reckitt's account. Twenty such
cheques had been paid into Lord Terrington's account with
the appellant bank. In respect of fifteen of these cheques,
amounting in all to 17,890]., dated at different periods
between May 15, 1922, and February 20, 1926, Sir Harold
Reckitt brought the present action claiming the amount
mentioned as damages for the conversion of the cheques.
The bank, denying the conversion, relied upon s. 82 of the
Bills of Exchange Act, 1882, alleging that the cheques were
crossed cheques and that they had received payment of
them for a customer in good faith and without negligence.
As to two of the cheques, they also said that they were
holders in due course. Rowlatt J. decided in favour of
the bank on the issue of negligence; the Court of Appeal
decided against the bank in respect of all the cheques
except the first two and gave judgment against the bank
for 13,4907. The bank appeal from the judgment of the
Court of Appeal and the respondents cross-appeal seeking
to have judgment for the whole 17,890/. For the purpose
of determining the issues so raised, it is necessary to state
the circumstances in which the cheques came into existence.

Since 1899 Lord Terrington and his predecessors had had
a banking account with the Cornhill branch of the appellant
bank. In 1922, the first of the material years, Lord
Terrington had two accounts, No. 1 and No. 2. They were
both in the firm name, Lord Terrington being at this time
the sole member of the firm. No. 1 account appears to have

v.
RECKITT.

A. C. AND PRIVY COUNCIL.

11

been used almost exclusively for meeting private expenditure ; H. L. (E.)

No. 2 seems to have been the business account. No. 1 account
was, except for a short interval, always overdrawn. No. 2
account was throughout, except for a short interval, in credit.
The net balance from time to time varied, at times being a
credit, at others a debit. It is clear that the manager was
never completely satisfied with the position of the account.
It gave him "a certain amount of anxious care.'"' The over-
draft on No. 1 account was, at one time at any rate, con-
sidered by the bank not to be protected by the credit of
No. 2. A _ solicitor's No. 2 account they thought was
generally made up of clients' money: and, though Lord
Terrington gave them assurances as to this, with which they
said at the trial they were satisfied, it is obvious that the
uneasiness never ceased. In January, 1923, acting it is
said on legal advice, they took what they call an
hypothecation form in which the customer charged any
moneys standing in his name to the credit of any account
with the repayment of the moneys owing on any account.
How this increased their rights if the money was the customer's
money, or gave them any rights if the money was clients'
money, it is perhaps not necessary to discuss. A reference to
some of the earlier communications between the bank and
Lord Terrington will suffice. In January, 1922, the bank
record that at an interview Lord Terrington arranged that
he would keep his overdraft on No. 1 account much smaller
in the future and that they were to advise him in writing
before the figures got large. On February 17 Lord Terrington
is informed that No. 1 account stands overdrawn 11291.,
which perhaps he would arrange to cover. On February 24
it is 12741. and his kind attention would greatly oblige. On
April 4, 1922, at an interview the bank pointed out that they
did not care about No. 1 being consistently overdrawn against
No. 2, "' the reason being that it is commonly understood that
a solicitor's No. 2 account is commonly made up of clients'
money. Lord Terrington did not agree to this, but after some
conversation said that he would place his No. 1 account in
credit." On May 9, 1922, the bank write that No. 1 was

1932
—~—
MIDLAND
Bank
v.
RECKITT.

Lord Atkin.

12

H. L. (E.)
1932

Ww
Mipnanp
Bank
v.
RECKITT.

Lord Atkin.

HOUSE OF LORDS [1933]

19051. overdrawn and would he kindly let them have a transfer
from No. 2 to put No. 1 in credit. On May 15, 1922, the bank
write a stiff letter : "' We would again draw your attention to
the accounts of Messrs. Woodhouse & Co., No. 1 account
overdrawn 21681. .... As we mentioned to you recently,
our Head Office insist that these accounts should be kept
in credit and we would ask you to be good enough to see
that the present overdrafts are covered without delay
and that the accounts are kept in credit in future." Never-
theless No. 1 account continued to be overdrawn, and
from time to time the net balance on both accounts was in
debit. In January, 1923, as I have said, the bank took an
hypothecation form over No. 2, though with some doubts as
to what their position would be in the event of bankruptcy.
For the remainder of 1923 the account appears to have been
kept to the satisfaction ofj the bank. In January, 1924, the
bank were a little uneasy at being asked to pay some 6001.
worth of cheques, making the total of the two accounts over-
drawn to that extent, on the strength of the promise of a
cheque of 1000/. due on a completion. The cheque, however,
duly arrived a day late. In February comes the first of the
transactions in which the bank have been found to be liable.
On February 23 the bank write to their customer that with
reference to their telephone conversation of the previous
afternoon the net overdraft on his accounts amounted to some
2501. and they would be obliged for his attention early on
Monday morning. On February 23, a Saturday, Lord
Terrington drew a cheque for 500/. on Sir Harold Reckitt's
account, dated February 25, in favour of Messrs. H. J. 8S:
Woodhouse & Co. or order, drawn as attorney in the form
above described, and he enclosed it duly endorsed in a letter
to the bank on February 23 with another cheque of 23/. " for
credit No. 2 account, H. J. S. Woodhouse & Co."

The drawing of this cheque was a fraud on Sir Harold
Reckitt. It was not drawn to put the attorney in funds in
respect of any past or future expenditure on behalf of his
principal. In simple language the attorney stole the money
and applied it to his own purposes—in fact to pay his debt

A. C. AND PRIVY COUNCIL.

13

to the bank. On March 11 the bank wrote that the firm's H. L. (©)

account frequently goes into debit, for which there is no
arrangement, and at the present time is overdrawn some 88).,
and they would be glad of his attention, and think it very
desirable they should have an interview. On March 13
Lord Terrington sent a cheque for 400/. drawn as the last -
the accounts on the evening before were on balance overdrawn
2401. On March 14 the bank wrote: " Having regard to
the circumstances last evening we must ask you in future
to be good enough to see that we are provided with funds to
meet any cheques that are presented in your firm's account,
as we cannot undertake to overpay the account, nor can we
accept the responsibility of notifying you that funds are
insufficient to meet your drawings." On March 21 there was
an important interview. The bank asked Lord Terrington
to transfer sufficient funds from No. 2 account to wipe out
the debit balance on No. 1 account. 'They asked what was
the cause of the account being constantly overdrawn and
asked that arrangements should be made to keep it in credit.
Lord Terrington replied that he had some 15,0001. owing to
him by clients. Such debts were all good, but he was unable,
owing to pressure of business, to send out the necessary
accounts. He does not appear to have suggested to the bank,
nor would it have been the fact, that he had made any
disbursements from his own account on behalf of Sir Harold
Reckitt, which he could as attorney repay himself. There is
no evidence that at any time the bank knew that Lord
Terrington acted on any occasion as Sir Harold Reckitt's
solicitor. The same day he sent the bank a cheque for 4501.
drawn on Sir Harold Reckitt's account as before. At the end
of the day before the interview No. 1 account was in debit
51901.; there was a credit balance on the two accounts
combined of 197/. On March 28 there was another somewhat
acrimonious interview when the combined overdraft was
about 300/., and on March 31 Lord Terrington sent another
Reckitt cheque for 4001. On April 8, the combined overdraft
being 1253/., Lord Terrington, after another reminder from
the bank, sent another Reckitt cheque for 2501.

1932

ae
MIDLAND
Bank
v.
ReEcxKIrr.

Lord Atkin.

14

H. L. (E.)
1932

——
MipLanp
BANE

Vv.
REcKEITT.
Lord Atkin,

HOUSE OF LORDS [1933]

It is convenient, I think, to pause here and survey the legal
relations of the parties in respect of this group of five cheques,
amounting to 2000/., which in the course of forty-three days
were paid in to his account by Lord Terrington. The Court of
Appeal, rightly as I think, came to the conclusion that the
rights of the parties would be determined by the view taken as to
these particular transactions. In the first place Lord Terrington
had no actual authority to draw these cheques at all or to
receive the proceeds. His only actual authority was to draw
cheques for his principal's purposes. Accordingly, if it can
be supposed that Sir Harold Reckitt found Lord Terrington
standing at the counter of the bank waiting to pay in one of
the cheques he could, if he knew the true facts, have demanded
the immediate delivery of the cheque to him. It was his
property, and Lord Terrington had no title to it. In these
circumstances I have no doubt that the bank in presenting
and receiving payment for the cheques converted them. I
venture to quote words of my own used in Underwood's
case (1) merely because they seem to me applicable and I
cannot express the idea in simpler language: " The bank so
disposed of the chattels, the cheques, as to deprive both
themselves and the true owners of the dominion over them,
and in exchange for the pieces of paper constituted them-
selves the debtors of the customer. I cannot imagine a
plainer case of conversion." It is quite irrelevant to the
issue of conversion that after payment the pieces of paper
came into possession of the paying bank to be held as vouchers
on account of the true owner, Sir Harold Reckitt. This
position existed in the case of Morison v. London County and
Westminster Bank, Ld. (2), where the collecting bank were
held to have converted the cheques.

The only question therefore is whether the bank have
established that they received payment in good faith and
without negligence and so brought themselves within s. 82
of the Bills of Exchange Act, 1882. Their good faith is not
challenged. The issue therefore is confined to negligence,
and the onus of proving the absence of negligence is plainly

(1) [1924] 1 K. B. 775, 795. (2) [1914] 3 K. B, 356.

A. C. AND PRIVY COUNCIL.

cast upon the bank. But for the section they are liable for
conversion, and it is for them to bring themselves within
the statutory protection. My Lords, it appears to me, when
the facts are examined, that this case differs not in principle
from Reckitt v. Barnett, Pembroke & Slater, Ld. (1), where
Lord Terrington drew a cheque as attorney on Sir Harold
Reckitt's account in payment of a motor-car supplied to
himself. It was held that the vendors were liable to Sir
Harold for the amount of the cheque. Lord Carson shortly
states the conclusion of all the members of the House when
he says: "It is clear (1.) that the cheque was used
to liquidate the private debt of Lord Terrington, (2.) that
the defendants knew it was so used, and (3.) that the form
of the cheque gave them notice that the money was not the
money of Lord Terrington. In that state of circumstances
there is no evidence or any possible inference which can be
drawn that the agent was applying his principal's money in
discharge of any possible liability of his principal.' Precisely
the same state of things exists here. Lord Terrington was
applying these cheques in part payment of his overdraft—
i.e., of money lent to him by the bank. The bank knew
that he was doing so; indeed it was at their repeated
request that he made the payments. They had the same
notice in the form of the cheque that the money was not the
money of Lord Terrington. There is in the same way no
evidence and no possible inference that he was applying this
money in discharge of any possible liability of his principal.
It seems to me clear that in an omission of an ordinary busi-
ness precaution, in breach of a plain duty imposed upon a
creditor to take reasonable care to see that a known agent
paying his own debt to his creditor out of his principal's
money is acting within his authority, the bank were negligent
in making no inquiry as to their customer's authority to
make these payments. I doubt whether he could have satisfied
such inquiries however superficially made. Even if he had
answered the first inquiry the mere fact that the bank
showed themselves to be on their guard would probably
(1) [1929] A. C. 176, 191.

15

H. L. (E.)
1932

MipLanp
Bank

v.
RECKITT.
Lord Atkin.

16

HOUSE OF LORDS [1933]

H. L. (E.) have stopped the frauds. But, be this as it may, no inquiry
1932

ee

MipLanp
BANK

RE

v.
CKITT.

Lord

Atkin.

in fact was made and the bank fail to show that they acted
without negligence. The form of the cheque, as has been
pointed out, necessarily points to the money being Sir Harold
Reckitt's money. But to make the matter clearer s. 25 of
the Bills of Exchange Act, 1882, expressly provides that
"A signature by procuration operates as notice that the agent
has but a limited authority to sign, and the principal is only
bound by such signature if the agent in so signing was acting
within the actual limits of his authority."' It seems to be
suggested in the judgment of Lord Reading C.J. in Morison's
case (1) that the operation of this section was limited to
the time before the instrument was honoured, but that after
a bill so signed in excess of authority has been honoured
s. 25 did not confer a right to recover the proceeds. If the
words used meant to mark off a definite period within which
alone the section affects legal rights, I see no ground for such
a distinction. The effect of the statute is to give notice of
limited authority on the face of the document, and this
operates as and when the document is negotiated or delivered.
The legal consequence of such notice may be to prevent
the holder who obtains payment from supporting his right
to have received payment. The case of Reckitt v. Barnett,
Pembroke & Slater, Ld. (2), is a good instance. The rights
in respect of a bill after payment are no doubt matters
of special consideration; but whether before or after pay-
ment the fact that the bill contains on the face of it notice
of limited authority to place on it the particular signature
continues to be a fact affecting pro tanto the rights of the
parties both before and after payment. What effect, if any,
such notice has on an intermediate holder for value it is
unnecessary to discuss.

As to the remainder of the cheques in respect of which
the plaintiff succeeded in the Court of Appeal, I find it
unnecessary to discuss the facts in detail. In most cases
the account was overdrawn, but not in all. In some cases
only had there been pressure by the bank. But I agree with

(1) [1914] 3 K. B. 356. (2) [1929] A. C. 176.

A. C. AND PRIVY COUNCIL.

17

the view taken in the judgments below, that the bank's H. L. (E.)

position was affected by the transactions in 1924, and the
notice and negligence then found to have existed must be
taken into account when considering the subsequent transac-
tions. When all the relevant facts are so considered, I think
the Court of Appeal were right in concluding that, in respect
of these cheques also, the bank had not discharged the onus
of disproving negligence.

With regard to the first two cheques complained of, in
respect of which the Court of Appeal decided in favour of
the bank, I have, after some doubt, come to the conclusion
that the decision should not be altered. There was the same
lack of actual authority as in the other cheques and the same
notice ; but the cheques were not specifically drawn to meet
claims of the bank. They were drawn in one case to
fictitious payees, Pearson & Co.; in the other case to
Woodhouse & Co.; but in both cases a cheque of equivalent
amount was drawn out practically simultaneously—in the
first to Pearson & Co., in the second to one Buxton, with
whom Lord Terrington seems to have had some joint adven-
ture. They appear to have been the first cheques drawn
fraudulently by the solicitor, and upon the whole I see no
ground for differing from a decision that in these two cases
the bank acquitted themselves of negligence.

It remains to deal with contentions of the bank based
upon the terms of the power of attorney. The bank never
in fact asked for or saw the terms of the document; and,
for my part, I venture to doubt whether in such circum-
stances they could ever rely on any other than an actual
authority. Ostensible authority appears to be excluded
when the party averring it cannot show that any appearance
of authority other than the actual authority was ever dis-
played to him by the principal. He neither shows a repre-
sentation nor that he relied on it. But in this case, as the
members of the Court of Appeal have pointed out, the notice
found to exist defeats reliance on ostensible equally with
actual authority. Neither in the one case nor in the other
can the agent be assumed to have authority to pay his own

A. C. 1933. 3 C

1932
——
MIDLAND
Bank
v.
RECKIT?I.

Lord Atkin.

18

HOUSE OF LORDS [19383]

H. L. (E.) debts with his principal's money. It was said, however,

1932
MipLanp
Bank

v.
REcKEITT.

Lord Atkin.

that the clause of the power of attorney whereby the principal
"ratifies and confirms and agrees to ratify and confirm
whatsoever the attorney shall do or purports to do by virtue
of these presents"? protects the bank. The clause in some
such form is of long standing. It does not appear to be
happily worded; for a ratification in advance seems to
contradict the essential attributes of ratification as generally
understood. It cannot, I think, be construed as extending
the actual authority given by the power of attorney; it
may amount to a promise to adopt acts done within the
ostensible authority; and this strengthens the position of
those who rely on the ostensible authority by an express
promise as well as by an estoppel. If this be so it is difficult
to see how the promise could be available except to some
one who was aware of it and who acted on the strength of
it. But in any case it would appear to be a highly
improbable construction to suppose that a principal using
this form has precluded himself from objecting to a dealing
with his property by a person who had notice in ordinary
circumstances that the agent was exceeding his authority
actual and ostensible. It would mean that the principal
was saying either "I give you actual authority within
defined limits but ostensible authority to do what you like
with my property so long as you pretend (' purport') to be
doing it under this document"; or "I give you similar
actual authority." Such a construction would make powers
of attorney a danger instead of a business facility and would
certainly defeat the intention of any reasonable principal.
I think, therefore, that the notice in this case defeats this
defence.

The cheques on which the bank have been held liable
were crossed and marked not negotiable, except two—
March 13, 1925, Lloyds or bearer, 1000/., and February 20,
1926, Woodhouse & Co., 3901. As to these two, the bank
claim to be holders in due course to the extent of the over-
draft existing when they were paid in. That they were
holders for value to that extent is, I think, true whether

A. ¢. AND PRIVY COUNCIL.

the value is said to be the payment of the antecedent debt
(the overdraft), or to be the lien to the extent of the over-
draft (Bills of Exchange Act, 1882, s. 27, sub-s. 3). But
the notice already referred to defeats their right to be con-
sidered holders in due course. In other respects it was not
suggested that there would be any difference between these
and the other cheques following the group which I have
discussed in detail.

For the above reasons I think that the appeal and cross-
appeal should be dismissed, with costs.

My Lords, I am asked to say that my noble and learned
friend, Viscount Dunedin, and my noble and learned friend,
Lord Thankerton, concur in the judgment which has been
delivered.

Lorp WaRRINGTON oF Ciyrre. My Lords, I have had
the advantage of reading the opinion of my noble and learned
friend, Lord Atkin, and I concur in it.

Lorp Macmititan. My Lords, I also concur.

Order of the Court of Appeal affirmed and original
and cross-appeals dismissed with costs.

Lords' Journals, February 29, 1932.

Solicitors for the appellants in the appeal and respondents
in the cross-appeal: Coward, Chance & Co.

Solicitors for the respondents in the appeal and appellants
in the cross-appeal: Nicholl, Manisty & Co.

19

H. L. (E.)
1932
MipLtanp
Bank

v.
RECKITT
Lord Atkin.

20 HOUSE OF LORDS [1933]