JUDGMENT OF RODNEY HANSEN J

Solicitors:
Carter & Partners, P O Box 2137, Aucldand for Plaintiff
Minter Ellison Rudd Watts, P O Box 2793, Wellington for Defendant

Introduction

[1] The plaintiff had two accounts with the defendant bank ("the Bank"). Its principal, Mr Inderjit Singh, withdrew funds from one of them to purchase a bank cheque. He offered the cheque to a company, Pakistan Emporium Limited, which was threatened with liquidation proceedings. The offer had not been accepted when the company was put into liquidation. The funds were then rebanked into the account from which they had been drawn.

[2] The liquidator of Pakistan Emporium claimed an interest in the funds. At his request, the Bank froze the funds. Mr Singh challenged the Bank's actions. He advised the Bank's manager the funds were needed urgently to meet commitments under an agreement to purchase land in India. The Bank refused to release the funds. Soon afterwards the liquidator obtained a Court order freezing the bank accounts.

[3] The plaintiff says the Bank should not have frozen the funds. Mr Singh claims that as a result of its action he lost the benefit of the Indian land agreement and forfeited money already paid. Damages are sought. By agreement I was asked to determine liability first.

[4] The Bank denies liability. It says that it was not in breach of its obligations to the plaintiff because:

[a] There was no valid and effective demand made on the Bank to pay out the funds.

[b] If the demand was valid and effective, the Bank was excused from acting on it by:

[i] The terms of its contract with the plaintiff and/or

[ii] Its duty as a potential constructive trustee.

Was there a valid and effective demand?

[a] Relevant facts

[5] Mr Singh said he made demand for the funds at a meeting with the Bank manager, Mr Christopher Lithgow, on 9 December or, at the latest, the following morning. The funds had been frozen by Mr Lithgow, on 4 December 1997. The previous day he had been advised by the liquidator of Pakistan Emporium that the funds belonged to that company. He was told that urgent application was being made to the High Court to "secure" the funds. He was asked to freeze them in the interim.

[6] Mr Lithgow attempted to contact Mr Singh by telephone but did not speak to him until 9 December when they met at the Bank's office. He told Mr Singh what he had done and why. Mr Singh told him that the funds represented by the bank cheque belonged to the plaintiff. He said the liquidator of Pakistan Emporium had no right to make a claim. Mr Lithgow told Mr Singh the Bank was not in a position to make a judgment in relation to the disputed funds and they would remain frozen until the position had been clarified.

[7] Mr Singh claims that at the meeting he also told Mr Lithgow that the funds were urgently required for the purpose of the property deal in India. Mr Lithgow denies this was referred to. However, he received notice of it the following morning when Mr Singh wrote to the Bank stating that his company had nothing to do with Pakistan Emporium and enclosing a fax he had received from India advising him that $10,000 needed to be paid for the land deal by 12 December 1997. I set out in full the text of the two letters:

9.12.97

URGENT

ATT: MR CHRIS LIGTHOW

THE NATIONAL BANK

NEW MARKET BRANCH AUCKLAND

I refer my meeting with you to day and shocked to know that you have frozen my company account on the instruction of McVeagh Fleming solicitor, despite my explanation to you that my company has nothing to do with Pakistan Emporium Ltd liquidation.

McVeagh Fleming and you have no legal right to froze my company account. You are well aware that large amount of funds were deposited by me. Therefore, your action to act on solicitor letter was absolutely wrong. I will make complaint against McVeagh Felming to the Auckland District Law Society about their unlawful action.

Please find herewith letter I received from India. If payment is not sent by tomorrow I would loss my deposit and business deal in India. Your bank would be responsible for my all damages.

Kindly fax me your final decision on my home fax no 6270465. You also requested that no information should be given about my company to any person. (sic)

The fax from India which was attached read:

I refer my talk with you over the phone today about more New Zealand ten thousand dollars need to be paid according to the agreement by 12 of December 1997. If payment is not received by urgent T.T on this Friday, you would loss entire 2 million Indian rupees deposit already been paid. Thus deal would be cancel and I should not be hold responsibly for it. Please advice me urgently about the payment an fax me copy of the T.T along with bank detail to I can contact bank in New Delhi. (sic)

[8] Mr Singh had difficulty faxing the letter. Although dated 9 December, it was not finally sent until 9.29 a.m. on 10 December. Following its receipt, Mr Lithgow told the plaintiff he would not allow the funds to be withdrawn until he had ascertained whether the liquidator of Pakistan Emporium had obtained a preservation order, as he had earlier said he would.

[9] Coincidentally, at 10.27 a.m. that day, the liquidator's solicitor filed an ex parte application for a preservation order. He obtained an urgent hearing and by late morning had obtained the order. Mr Lithgow learnt of this in a telephone conversation at about midday. Later in the afternoon he received by fax a copy of the preservation order. He complied with the order immediately, sending a bank cheque for the disputed amount to the Registrar of the Court. Shortly afterwards the plaintiff applied for a discharge of the preservation order. It was discharged by consent in late April 1998.

[b] Counsel's arguments

[10] Mr O'Callahan submitted that demand was made on the afternoon of 9 December when the plaintiff met with Mr Lithgow or, at the latest, when the letter was faxed to the Bank on 10 December. He accepted that as soon as the Bank received notice of the preservation order, it could no longer release the funds but submitted that it should have acted immediately to release the funds.

[11] The Bank's position was that the only communication which could have constituted an effective demand was the faxed letter sent on 10 December. Mr Chan submitted that it was too vague to constitute a valid instruction but, even if it was effective, by its terms it did not require the funds to be paid out until after the preservation order was made.

[c] Legal principles

[12] Under the implied contract between banker and customer, a bank borrows money from its customer and undertakes to repay it either on demand being made or the bank being wound up: N Joachimson v. Swiss Bank Corporation [1921] 3 KB 110; [1921] All ER Rep 92 (CA). The bank is not liable to repay the customer until demand is made. A demand by a customer for payment of funds held in a bank account can take one of two forms. One is for money to be paid or, more accurately, repaid direct to the customer. The other is for the bank to pay a third party.

[13] The bank is obliged to act on any unambiguous written order: London Joint Stock Bank Limited v. Macmillan and Arthur [1918] AC 777; [1918-19] All ER Rep 30. The demand need not be on any particular form, although it is usually in the form of a cheque: Burnett v. Westminster Bank Limited [1965] 3 All ER 81, 85-6. However, the demand must be clear and unequivocal and the bank is entitled to refuse payment if it is ambiguous: London Joint Stock Bank v. Macmillan and Arthur (supra), Joachimson v. Swiss Bank Corporation (supra). There is no direct authority as to whether a demand must be in writing, although there seems no reason in principle why it must be. I respectfully agree with the comment of Parker J in Arab Bank Limited v. Barclay's Bank (Dominion, Colonial and Overseas) Limited [1952] WN 529; [1952] 2 TLR 920 that, as the necessity for a demand at all results from implying a term, there seems little necessity in going further and implying that such demand must be in writing - see also Holden, The Law and Practice of Banking: vol 1 (3rd ed) para 2-12.

[d] Was there a demand?

[14] The Bank's defence proceeded on the basis that the plaintiffs letter was an ineffectual demand to pay a third party. I agree that neither the faxed letter nor its enclosure, together or separately, could be effective for that purpose. An order to a bank to pay a third party must be in a form that is clear and free from ambiguity and which will enable the bank to fulfil its obligations: London Joint Stock Bank v. Macmillan (supra) at 814; 48. The communications were inadequate for that purpose. They lacked the basic information necessary for the Bank to act. The payee is not identified or any means by which payment could be effected.

[15] Even if the letter could be construed as a demand to pay another party, it is strongly arguable the Bank did not refuse it. The letter requested payment "tomorrow", that is on 10 December 1997. There is merit in Mr Chan's submission that the Bank had until the close of business on that day to comply with the request. It was not in default when the preservation order was made which prevented any disbursement from the account.

[16] I turn now to consider whether there was a demand to pay the funds to the plaintiff. Mr Singh did not expressly demand that the Bank pay the plaintiff the disputed funds. His instruction was that the funds be released for the plaintiff to draw on. At the meeting on 9 December and again by the letter and the later telephone conversation on 10 December, he challenged the Bank's decision to freeze the funds. Rather than demand repayment of the funds, he asserted the plaintiffs right to draw on them. Mr Lithgow said that by the morning of the 10th he was left in no doubt as to the plaintiffs intentions in this regard.

[17] The question is whether this was an instruction which the Bank was obliged to meet under the implied terms of its contract with the plaintiff. In my view, it was. In the face of a reaffirmation by the Bank that the funds would not be released, I think it reasonable to view Mr Singh's challenge as equivalent to a demand to pay the money to the plaintiff There is no practical distinction between a demand to pay the money to the plaintiff and an instruction to make the funds available for the plaintiff to draw on. Both are clear notice to the Bank that the customer wants the money in the account.

[18] There is no logical reason why the implied obligation to act on a customer's demand to pay should not extent to include an obligation to make funds in an account available to draw on. As discussed in Paget's Law of Banking (11th ed 1996) at p 112, the implied obligations to make and act on demands for payment are dictated by business efficacy. Considerations of business efficacy similarly require that a bank should release the funds available in an account on demand being made by the customer should that be necessary.

[19] I conclude that there was an effective demand made by the plaintiff for the funds to be released. I turn now to consider whether there were proper grounds for the Bank to refuse the demand.

First ground for refusal: the Bank's mandate

[a] Counsel's arguments

[20] Mr Chan argued that the following clause in the mandate given to the Bank on behalf of the plaintiff permitted the Bank to freeze the funds:

Disputes Affecting any Account

If any dispute arises concerning any of the customer's accounts, the Bank may refuse to allow the account to be operated until the Customer confirms in writing that the dispute has been resolved.

He submitted that there was a dispute for the purpose of the clause between the liquidator of Pakistan Emporium Limited and the plaintiff customer over ownership of the funds represented by the bank cheque. He argued that the Bank was entitled to refuse to pay out the funds until the plaintiff confirmed in writing that the dispute had been resolved. He said that, on the evidence, no such confirmation had been given.

[21] Mr O'Callahan submitted, first, that the plaintiff was not bound by the mandate. Secondly, he contended that it did not cover disputes between the customer and third parties. He argued it was limited to disputes between the Bank and its customer.

[b] Whether the plaintiff was bound

[22] The mandate was given to Mr Singh by Mr Lithgow at a meeting. He was asked to take it away and sign it in front of a witness which he did. Mr Singh said he did not understand what he was signing as he has only limited ability to read and write English. Mr Lithgow said he followed standard practice in explaining the terms of the mandate to Mr Singh before he took it away. Mr Singh does not recall this happening but I accept Mr Lithgow's evidence on this point.

[23] As a general rule, a party who has signed a document is bound by it, unless his signature has been procured by fraud or misrepresentation. It is "wholly immaterial" whether he has read the document: L'Estrange v. Graucob [1934] 2 KB 394, following Parker v. South Eastern Railway Company (1877) 2 CPD 416. In some circumstances a party's signature on a document may not be sufficient to establish notice of its terms, see for example Crocker v. Sundance North West Resorts Limited (1989) 51 DLR (4th) 321. But this is not such a case. The Bank had taken reasonable steps to draw the conditions to the plaintiffs attention. The facts are quite unlike those in Burnett v. West Minster Bank Limited (supra at para 13) which was relied on by the plaintiff, where the condition in question was introduced without notice on a new cheque book cover. Mr Singh knew the document contained conditions which were intended to regulate the plaintiffs dealings with the Bank. The general effect of the terms was explained to him. He was given the opportunity to take additional steps to have the terms read and explained to him by someone independent. It cannot be said that he did not have reasonable notice of the term relied on.

[c] Meaning of clause

[24] In support of his contention that the clause should be confined to disputes arising between the Bank and its customer, Mr O'Callahan relied on Tai Hing Limited v. Liu Chong Hing Bank [1986] 1 AC 80 where the Privy Council said clear and unambiguous provision is needed if a bank is to exclude rights which a customer would otherwise enjoy under the implied contract. I agree with Mr O'Callahan that a similarly rigorous approach should be taken to the construction of a condition which seeks to restrict the rights or extend the obligations of a bank's customer. Any ambiguity should be resolved so as to minimise departure from the implied terms identified in London Joint Stock Bank v. Macmillan (supra).

[25] The operation of the clause is defined in expansive and unqualified terms to cover "any dispute" concerning "any of the customers' accounts". Construed literally, it is capable of extending to disputes involving claims by third parties. However, I think there are telling reasons against such a construction which favour confining the operation of the clause to disputes between bank and customer.

[26] First, the broader construction maintained by Mr Chan would potentially extend to any disputes involving third parties. It would give the Bank power to freeze a customer's account on unilateral notice of a dispute from a third party. That would be a major inroad into the Bank's fundamental contractual duty to act on its customers s instructions. Such a departure should occur only in a plain case and by clear and unambiguous language.

[27] The clause stipulates that the Bank's right to freeze the account comes to an end when the customer confirms in writing that the dispute has been resolved. That is inconsistent with the construction contended by the Bank. It would permit a power, which could be exercised by the Bank on notice from a third party, to be curtailed by the unilateral act of the customer. The use of the word "confirms" is also consistent with a construction which would limit the clause to disputes between the Bank and its customer. Confirmation presupposes prior knowledge on the part of the Bank. That cannot be assumed if the dispute involves the customer and a third party.

[28] Finally, a power in the broad terms contended on behalf of the Bank is unnecessary to protect it against the claims of third parties. As the discussion in the next section of this judgment will show, the Bank is both bound and protected by its duty not to assist those acting in breach of trust. It will not be liable for acting honestly on notice of a third party claim to funds in a customer's account.

Second ground for refusal: the Bank's duty as constructive trustee

[29] Mr Chan submitted that the duty of the Bank to act on its customer's demand yielded to an obligation under the general law not to assist in a breach of trust. He said that the Bank was both entitled and obliged not to act on Mr Singh's demand until it was satisfied that the liquidator had no claim to the funds.

[30] As a general rule, a banker is not concerned to enquire into the sources from which its customers derive their money or to pay heed to the claims of third parties to such funds: Paget's Law of Banking (11 ed, 1996) p 161. This general proposition is qualified by obligations arising out of a bank's potential liability as constructive trustee.

[31] Where a bank knows or has reason to believe that a third party has an entitlement to funds held in a customer's account, its obligation as a potential constructive trustee for the funds entitles it to refuse to comply with its customer's instruction: Westpac Banking Corporation v. Savin [1985] 2 NZLR 41, Renshaw v. Post Office Bank Limited (1992) 4 NZBLC 102,846.

[32] In this case any modification to the Bank's duty derives from its obligation not to dishonestly assist a breach of trust. Knowing receipt is not an issue. Such a claim is confined to cases where the recipient has received the property for his own use and benefit: Paget's Law of Banking at 432; see also Twinsectra v. Yardley [2002] 2 All ER 377 at 404.

[33] The scope of the duty not to provide dishonest assistance has been authoritatively determined by the Privy Council in Royal Brunei Airlines Sdn Bhd v. Tan [1995] 3 All ER 97, [1995] 2 AC 378 (PC). It is now established that to hold a bank liable as constructive trustee for dishonest assistance, the following elements, must be established:

[a] The existence of a trust. It is sufficient for this purpose that there be a fiduciary relationship between the trustee and the property of another person.

[b] A breach of trust.

[c] Assistance by the bank in breach of trust.

[d] Dishonesty on the part of the bank. Dishonesty for this purpose involves both an objective and subjective element. The standard is that of reasonable and honest people but the accessory must act with conscious impropriety": Royal Brunei at pp 105-6, 389 and see discussion in Twinsectra (supra).

[34] The Bank claims that it was put on notice of the existence of a trust for the funds in issue and that to have made the funds available to the plaintiff would, if the trust were shown to exist, have resulted in dishonestly assisting a breach of the trust.

[35] The issue then is whether the Bank, having received notice of a claim by the liquidator, was entitled to refuse the plaintiffs demand in pursuit of its obligation not to act dishonestly.

[36] In considering that question, all the circumstances known to the Bank should be considered. They include the nature and importance of the proposed transaction, the nature and importance of the Bank's role, the ordinary course of business, the degree of doubt, and the alternative courses open to and the consequences to affected parties. The circumstances will dictate which one or more of the possible courses should be taken by an honest person: Royal Brunei Airlines v. Tan at 107; 390.

[37] In this case, a consideration of the relevant circumstances begins with the notice received by the Bank of the liquidator's claim. It comprised phone calls from the liquidator himself and his solicitor, followed by a letter from the solicitor advising as follows:

We act for Mr Bryan Williams who was on Friday 28 November 1997 appointed liquidator of Pakistan Emporium Limited.

During several High Court hearings Mr Khan of the company has represented that the company held a bank cheque of $15,073.98 drawn on account number 851045 060596 0998907 03. We under that the bank cheque has now been placed in another account which has been identified to Mr Williams. Those funds belong to the company (in liquidation).

Urgent application will be made to the High Court to secure those funds and we formally ask that those funds be frozen by the Bank in the interim.

[38] Mr Lithgow ascertained that the cheque had been rebanked into the account on which it had been drawn, contrary to the advice in the letter that it had been placed in another account. He immediately took steps to ensure that the funds could not be withdrawn pending further notice. He advised the liquidator that the Bank had "stopped" the accounts, although he had in fact only frozen the funds, the subject of the notice.

[39] On 9 and 10 December, Mr Singh maintained, in oral and written communications with the Bank, that the funds belonged to the plaintiff and that the liquidator had no claim to them. Mr Lithgow declined to act on that information and to release the funds until he had ascertained whether the liquidator had obtained the Court order referred to in the letter.

[40] Mr O'Callahan submitted that Mr Lithgow should not have acted on the liquidator's claim. He pointed out that the factual basis of the notice was incorrect. The proceeds of the cheque had been deposited back into the same account, not into a different account as the letter said. He submitted that this undermined the liquidator's claim of misappropriation. In the absence of further information which substantiated the liquidator's claim to the funds, Mr O'Callahan argued that the Bank should not have acted as it did. In the circumstances he submitted the Bank could not have been liable as a dishonest accessory if it had acted on Mr Singh's demand to release the funds.

[41] In my view, the issue is not whether the Bank would have been liable had it released the funds and the liquidator's claim later been substantiated. It is whether, on the information available to him, Mr Lithgow acted as an honest person would in the circumstances. That, it seems to me, is the extent to which the contractual duty to comply with a customer's instruction is modified by the general duty not to provide dishonest assistance. The correlative obligation is to act honestly when in receipt of knowledge of a trust which would or may be breached by acting in accordance with the customer's instructions.

[42] I am satisfied that the Bank acted in accordance with that obligation both in freezing the funds in the first place and declining to release them when demand was later made. The Bank manager was bound to treat seriously a notice of claim from a Court appointed liquidator who was acting on legal advice. The solicitor's letter did not purport to set out the full factual basis for the claim but contained sufficient to substantiate the liquidator's position. The advice that steps would be taken to secure the funds by Court order would have provided the Bank with further justification to freeze the funds. It showed that the liquidator had confidence in the claim. It required only interim action to be taken by the bank. And it provided a means by which any competing claims would be determined by the Court.

[43] In my view, the Bank's knowledge that the funds had been returned to the account from whence they came did not provide a sufficient basis for it to disregard the liquidator's claim. The letter said the cheque had been held out as the property of Pakistan Emporium. The fact that the funds came from the plaintiffs bank account in the first place does not contradict that claim. Pakistan Emporium could have had a pre-existing interest in the funds or acquired an interest as a result of actions on behalf of the plaintiff following their withdrawal.

[44] Demand for the funds to be released was made at the earliest in the course of the meeting on 9 December, although I am inclined to think that no unequivocal demand was made until the following day. In my view, Mr Lithgow acted honestly and reasonably in declining to release the funds until he knew the outcome of the liquidator's application for a preservation order.

[45] I conclude that the Bank was excused from acting on the plaintiffs demand by its obligation not to dishonestly assist in a breach of trust.

Result

[46] The plaintiffs claim fails. If the parties are unable to agree on costs, I will consider memoranda filed by the defendant within fourteen days and the plaintiff within a further fourteen days.