National Court of Papua New Guinea

(3) &ـ&#1hethenot taintifintiff in not notifying the bank earlier of the mihe missingssing cheq cheques tues to stop paying the cheques and in not aining an adequate and effective system to ensure safety and protection of the cheque booksbooks and failing to maintain an effective accounting system was negligent?

The third issue raised by the defendant can be dealt with fairly quickly and I can say at the outset that such issue does not arise at all for two reasons: (a) I accept the evidence by Mr. Sam Akunai that the forgeries were not discovered until three months later when their new computerised accounting system was properly in place. His evidence was not challenged nor contradicted. It could be criticised for not having a back-up or an effective system in place to detect the fraud earlier and to promptly put the bank on notice. But such failure itself, in my view, ought not amount to negligence if there is no evidence to suggest that it was within the defendant’s ability to immediately put in place an alternative working system that could have equally benefited the plaintiff but it did not resort to it. Similarly the defendant cannot now argue that it was the plaintiff’s own failure in not maintaining and an adequate effective system to ensure safety and protection of the cheque books because the defendant has led no evidence to throw the ball onto the plaintiff’s court to raise any question about the plaintiff’s negligence. This is a clear misconception of the evidence before the court. Therefore this is a non-issue.

As to the title of the cheques passing to the forger Daniel Lulume, this was not raised as a specific issue in this trial and it has not been properly addressed by both parties and I see no merit in venturing on this point that appears to have been raised as an afterthought. Besides the ownership issue of the cheques was not pleaded as a defence by the defendant hence no evidence had been led on this aspect.

The issue before this court on the evidence is whether the defendant acted in good faith and without negligence in the ordinary course of business in paying the said cheques? The same issue is put in another way by the plaintiff which is: Was the defendant negligent in not properly and diligently exercising its duty of care it owed to the plaintiff to receive and keep its money in safe custody as it is obligated by law so to do?

But the defendant submits that the question of negligence does not arise as the plaintiff had not pleaded negligence and is therefore estopped from relying on negligence. I fail to grasp the defendant’s reasoning on this argument for the reasons set out herein.

Firstly, it is quite obvious that this claim based on statute, s. 29 of the Bill of Exchange Act Ch. 250. The Plaintiff’s contention is that the withdrawals conducted on its account were done without its authority, hence unlawful. The unlawfulness of the transaction is that the Defendant failed to exercise reasonable care and vigilance in ensuring that no fraud was committed as against its interest that the Defendant was under duty, both in common law and statute, to safeguard against. Inferentially it was therefore plain as day-light itself for the Defendant to realise without direct prompting that the law of negligence applied.

Secondly, if it was unclear to the Defendant as to the basis of the Plaintiff’s claim, it had the opportunities to request for further and better particulars of the Plaintiff’s statement of claim but it failed to do so.

And thirdly, the issue was not even raised in the trial during examination of witnesses by the Defendant nor was it put to the witnesses in cross-examination. The defendant did not even object to the plaintiff leading evidence on negligence.

Even the statutory defence under s. 91 of the Bills of Exchange Act relied on by the Defendant refers to the bankers, in this case the Defendant, acting in good faith and without negligence. And in reply to the Defendant’s defence, the Plaintiff specifically pleaded ‘as to paragraph 6 of the Defence, the Plaintiff denies that the Defendant acted in good faith or without negligence pursuant to section 91(1) of the said Act (ie the Bill of Exchange Act) in respect of any of the transactions. If the Defendant had not appreciated the nature of the Plaintiff’s claim, the Plaintiff’s reply to its defence ought to have alerted it. The Defendant who relied on this statutory defence, which implied negligence, must be taken to have known and accepted that the Plaintiff was suing on negligence of the Defendant to establish its case brought under s. 29 of the Act. And the defendant in turn was specifically relying on section 91 of the Act as its defence apart from alleging that the plaintiff was negligent. It was therefore equally duty-bound to prove that the Defendant acted in good faith and without negligence and that it was the plaintiff who was negligent. But the Defendant called no evidence to show that the Plaintiff was the negligent party in these transactions or that it was not negligent in wrongly paying a forger. There was no order from the plaintiff authorising the defendant from doing that.

On the evidence before me I need only have to be satisfied on the balance of probabilities that one or the other of the parties was negligent. I say at the outset that I am not impressed at all by the witnesses who gave evidence for the Defendant bank including the star witness in the Plaintiff’s case, Mr. Timbie. His entire evidence leaves me with a lasting impression that the police investigation into this particular fraud perhaps is far from over. This is indeed a peculiar case and conducted in an unusual way by the Plaintiff where it called a Defendant’s key employee who was the central figure in these transactions to establish its case. And by judging from the demeanour of the witnesses I am satisfied that the Defendant had neglected to exercise its duty imposed by statute and case law authorities.

The court accepts submission from the Plaintiff that the Court must draw a distinction at the outset between those situations where the Plaintiff’s cheque is altered, for example by adding in additional figures or words, this being accomplished by the customer leaving spaces which facilitate the fraud; those cases in which the customer leads the bank to believe that irregularity is condoned; those cases in which the proximate cause of the loss is something that the customer has done which induces the bank to believe that the collection and payment of the cheques is in order, and those cases where the signatures of the authorised signatories to the account are forged, as the case in point.

This is a case where the person who defrauded the bank is in jail after being convicted and sentenced for the fraud. There is no dispute about this. Section 29 is quite explicit in that any signature on a bill that is forged or placed on the bill without authority of the person whose signature it purports to be, that forged or unauthorised signature is wholly inoperative. That signature is meaningless and of no legal consequence for whatever it may worth as far as that bill is concerned. And the section goes on to emphasize that a person in possession of such a bill has no right to retain, to give discharge or to enforce payment of the bill against any party to that bill under the forged or unauthorised signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority. Expressed in simpler terms, the Australian Mercantile Law by Yorston & Fortescue, 16th Edn, The Law Book Co. Ltd, 1981 at p. 435 state:

‘Where the drawer’s signature on a cheque is forged, the paying banker cannot charge his customer’s account with it. There exists no protection to the bank similar to that afforded to it in the circumstances where an endorsement is forged. A banker is required to know his customer’s signature, but the principal reason for being unable to debit the customer’s account is that there exists no real order on the banker by the customer’.

The essence of the Plaintiff’s case is that the defendant had no right, given the fact that fraud has been proved and dealt with criminally, to debit the Plaintiff’s account. If the law is to strictly apply the defendant must refund the equivalent of K34,280.02 that it had withdrawn on the Plaintiff’s account and paid to the forger. The defendant is not precluded from relying on the forgery or want of authority. The only way it can avoid liability is under section 91 of the Act. But for this defence to succeed the operative words that give meaning to this section are ‘in good faith and without negligence’. Where the banker had acted in good faith and without negligence, he does not incur liability to the true owner of the cheque by reason only of having received payment of the cheque. As far as the evidence goes, there is much doubt on whether Mr Philip Timbie has acted in good faith. Weighing both his demeanour and my observation of him in the witness box, I am not prepared to find that he acted in good faith and in less than common sense manner in the way he dealt with this particular customer in the person of Daniel Lulume alias Nathan Suve. Indeed his entire manner in handling of these transactions were grossly negligible. For this Court to accept the evidence of Philip Timbie and to some extent by Jerry Kalai, the current manager of the Defendant bank, I would like to state for the record that the general public is placing itself at great risk by banking with the Defendant bank in its Goroka branch. With the Defendant’s negligence proved to my satisfaction, the Defendant cannot avail itself of the defence under s. 91 of the Act.

The duty of care that the banker owes to the customer is clearly expounded in the Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd & Anor [1981] CLR 304 and London Joint Stock v MacMullen & Arthur [1918] AC 777. The principle established in the two cases is that-

‘the contract between banker and customer gives rise to a duty upon the customer to take the usual step and reasonable precautions in drawing a cheque to prevent fraudulent alteration thereof which might occasion loss to the banker’.

However the principle of course relates to cheques that are drawn in such a way by the customers as to facilitate fraud thus occasioning loss to the banker. The duty of the customer to take all necessary precautions in the general course of running his business has been expounded on in many decided cases and one of the leading authorities on the law on this duty prevailing upon the customer is the case of THE KEPITIGALLA RUBBER ESTATES LTD v THE NATIONAL BANK OF INDIA LTD [1908] UKLawRpAC 15; [1909] 2 KB 1010. The principle expressed in this case is that:

‘It is the duty of a customer of a bank in issuing mandates to the bank to take reasonable care so as not to mislead the bank; but beyond the care that must be taken in or immediately connected with the transaction itself, there is no duty on the part of the customer to take precautions in the general course of carrying on his business to prevent forgeries on the part of his servants’.

This principle sets out the common law position which became part of the underlying law of this country since Independence. This case clearly illustrates that the customer may be estopped from denying the genuineness of the forgery. This may occur where the customer is aware of the wrongful practice and fails to warn his banker as was the case in GREENWOOD v MARTIN’S BANK LTD [1933] A.C. 51. In that case the husband advised the banker or the bank’s manager that the bank need not worry about the cheques being presented, even though the manager had voiced his suspicions about the authenticity of the signatures on the cheques. It was held that the customer was estopped from denying the genuineness of the forged signatures because the husband was put on inquiry by the bank’s manager, and the husband owed a duty of due investigation.

Relying on this principle the Defendant strongly argued that the bank acted in good faith and without negligence. It was submitted that the negligence ought to be attributed to the Plaintiff who failed to forewarn the bank or place stop notices on the cheques so that the fraud could have been prevented. It was also contended that the Plaintiff was negligent in not carrying out a regular audit or reconciliation of its account, which perpetuated the fraud to go undetected for almost three months. However the evidence is that at the time forgeries took place the plaintiff’s computerised system was undergoing some upgrading work and it could not access its accounts. The problem however was rectified eventually and whilst transferring data into the new computer system it was discovered that there were anomalies.

The defendant’s submissions with respect, lacks weight in that it has not led any evidence to show that the Plaintiff was negligent. The principles expounded in Greenwood v Martin’s Bank (supra) which the Defendant’s Counsel referred to and the Kepitigalla Rubber Estates Ltd v The National Bank of India Ltd (supra) both relate to instances where negligence was clearly proved against the customer. I do not have any evidence that the Plaintiff in this case was negligent in any way. The customer, the plaintiff was not aware of the forgeries at the time they occurred. That is the Plaintiff’s assertion and that has not been rebutted by the Defendant; hence, failed to discharge the onus on it to establish negligence on the Plaintiff’s part.

This is where the rationale in those two English cases cited above become quite penitent as far as section 29 of the Bills of Exchange Act is concerned. A party cannot enforce payment unless the party against whom it is sought to enforce payment of the bill is precluded from setting up the forgery. The only way for the bank to be precluded from setting up the forgery here, it is submitted, is if it is shown that the customer was guilty of some voluntary act that causes the banker to be misled into paying the cheques. That is not the case here and even the Defendant conceded that the forgeries were of ‘very good standard that no ordinary banker could have detected at the time of presentation and or negotiation.’ With respect, it is precisely for this reason that there are added safeguards such as those stipulated in the Bank’s own Internal Circular Instructions providing guidelines and assistance to bank officers to take extreme care and precautions in dealing with new customer’s who wish to open up new accounts. These instructions need to be followed to the letter for the bank to be absolved from any liability because even the instructions do caution of bank’s liability where there is laxity on the part of its officers.

For the Defendant to succeed in its defence it must show that the Plaintiff’s loss was attributable to its own negligence which must be linked to or immediately connected with the transaction itself and must have been the proximate cause of the loss. This is where the Defendant has failed to establish negligence. It even failed to call the teller or tellers who handled the cheques. The conduct of its case was far from satisfactory if there was ever any real interest to defend this case with full vigour. In order for the Defendant to avail itself of the protection in s. 91 (1) of the Bills of Exchange Act, which is the only relevant provision as far as this case is concerned, it must show that the collection of the cheques was ‘without negligence’. The onus of establishing circumstances showing an absence of negligence is said to be on the banker according to the case of THE LONDON BANK or AUSTRALIA LIMITED v KENDALL [ ] [1920] HCA 53; 28 CLR 401. The test propounded in Kendall’s case was that-

‘in order to obtain the protection of that section, a banker is bound to take such precautions in the true interests of the true owner of a cheque which he is asked by his customer to collect, as the circumstances known to the banker require. Where no precautions have been taken the test of whether the banker has been negligent is: Was the transaction in paying in the cheque, coupled with the circumstances antecedent and present, so out of the ordinary course, that if ought to have aroused doubts in the banker’s mind and caused him to make inquiry’.

It is submitted by the Plaintiff that the Defendant bank took no precautions whatsoever in respect of any of the cheques in question. The method of identifying Daniel Lulume was an antecedent circumstance; as was the fact that the cheque account was opened with a small amount of cash; as was the fact that the very next day there was a large deposit and a large withdrawal. None of these facts, according to the evidence, apparently concerned the bank. Philip Timbie only knew Daniel Lulume from only a greeting-distance for a period of some five years and only a year before the forgeries he managed to put the name to the face he had known for five years. In an important institution such as a bank, that was simply just not good enough for Mr Timbie to not call for more information on the new customer particularly so when M1 showed no evidence of Daniel Lulume having any account with PNGBC Goroka when he was acquainted with the face for five years because of the customer’s regular visit to the bank. It did not even surprise him that an accountant formerly employed with the Plaintiff was purportedly going into a different venture without even a bank account and assets like a car or a house. He was content to accept the grossly deficient M1 as it was and Mr. Kalai, the current branch manager of the bank, was prepared to go along with that. Logically thinking, it would seem to me that both men are probably in the wrong profession because no customer would want to bank where they work because their interpretation and translation of the circular instructions are grossly negligible, deficient, unprotective, uncaring and irresponsible. The attitude shown in the answers given by Mr. Timbie whilst giving his evidence for the Plaintiff demonstrates just how vulnerable it is for fraud to be committed in the defendant bank and I think the public must be warned so that the situation can be corrected. I do not say this with any disrespect for Mr Kalai and Mr Timbie but I am entitled to draw this conclusion from the evidence before me.

The defendant is therefore liable to the Plaintiff for its loss and I enter judgement on its behalf for the amount claimed with interest and I order cost in favour of the plaintiff.

Lawyers for the Plaintiff: Pryke & Co.

Lawyers for the Defendant: Paraka Lawyers