Linklaters (a firm) v HSBC Bank Plc & Anor

The central facts of this case are stark. They concern a cheque drawn by an English customer, on its English bank, payable to an English payee, crossed “a/c payee only”. In the event, an Italian national handed in the cheque to the Las Palmas branch of a Spanish bank, with instructions to credit the proceeds to a Puerto Rican company. After dealings with the cheque by both the Spanish bank and the English bank in various capacities, the proceeds were indeed credited to the Puerto Rican company and rapidly withdrawn. None of the money has been recovered. Prudently, it might be thought, the banks settled proceedings brought by the payee. This trial has been concerned with a dispute between the English and Spanish banks, as to responsibility between themselves for the debacle.

I turn to introduce the facts in a little more detail acknowledging that it will be necessary, later, to revisit some aspects of the history.

Zeneca Ltd. (“Zeneca”) was at all material times a customer of the First Defendant and Part 20 Claimant (“HSBC”, formerly Midland Bank plc) at its branch at 100 King Street Manchester.

On the 23^rd April, 1999, Zeneca drew a cheque (“the cheque”) for £989,112.66 on HSBC, payable to the Claimant (“Linklaters”), in settlement of legal fees. The cheque was validly signed in accordance with HSBC’s mandate from Zeneca. The cheque was crossed “A/C PAYEE ONLY”. The cheque was posted to Linklaters but was apparently stolen from Linklaters’ mailroom.

At some point thereafter, the cheque ended up in the hands of a Mr. Giammello, an Italian national, who, it subsequently transpires, has been described by the (British) police as a “well known criminal”.

On the 14^th May, 1999, Mr. Giammello handed the cheque to Mr. Ortigosa, the “foreign authorised officer” at Las Palmas, Canary Islands, No. 2 branch of the Second Defendant and Part 20 Defendant (“the branch” and “BPE” respectively). Mr. Ortigosa’s responsibilities included, in particular, the management of the branch’s foreign department. By this time, the cheque bore on its back a purported indorsement in blank from Linklaters; the indorsement was, in fact, forged. Mr. Giammello gave Mr. Ortigosa instructions for the proceeds to be collected into the account of United Financial Services Corporation (“UFSC”), a company incorporated in Puerto Rico, of which Mr. Giammello was President. On the same day, Mr. Giammello had, through Mr. Ortigosa, opened a US$ account in the name of UFSC at BPE.

Mr. Ortigosa asked Mr. Giammello to sign the back of the cheque, which he did. Later, BPE stamped the following wording on the back of the cheque:

Still on the same day, BPE sent the cheque by courier to HSBC’s branch at 100 King Street, Manchester, under cover of a letter dated 14^th May, 1999, entitled “remittance for collection and/or acceptance” (“the Remittance Letter”). By that Remittance Letter, which stated that the cheque was being collected for UFSC, BPE instructed HSBC, inter alia, to deliver documents against payment, advise BPE immediately in case of dishonour and, after payment, to remit the proceeds to BPE’s account with HSBC’s London office. The Remittance Letter was to be executed according to the Uniform Rules for the Collection of Commercial Paper, issued by the International Chamber of Commerce (“the URC”).

On the 18^th May, 1999, the cheque was reviewed twice by HSBC staff; the first time, by a Ms. Burke, the foreign desk clerk; the second time, because the cheque was for an amount greater than £50,000, by a Mr. Cooney, an authorised signatory. By letter dated 18^th May, 1999 to HSBC’s Currency Cheque Processing Department in London, Mr. Cooney authorised settlement of the cheque; the Remittance Letter was enclosed; the cheque itself was cancelled and retained by the King Street branch.

On the 21^st May, 1999, HSBC’s Currency Cheque Processing Department credited the proceeds of the cheque (less a fee of £11) to BPE’s account with HSBC, value 25^th May, advising BPE by SWIFT.

On the 25^th May, 1999, BPE credited the proceeds to a £ sterling account in the name of UFSC, opened that same day at Mr. Giammello’s request.

On the next day, UFSC withdrew in total approximately £588,000 from that sterling account. Nine days thereafter, on the 4^th June, 1999, UFSC withdrew a further £350,000. By now only some £48,000 remained; that sum was removed by a series of withdrawals, the last of which took place on the 3rd August, 1999. As already foreshadowed, none of the money has been recovered.

In the meantime, in July 1999, Mr. Giammello asked Mr. Ortigosa to collect for UFSC a cashier’s cheque for US$50,000,000, purportedly issued by Chase Bank of Texas, payable to the order of “Aetna Associates/M Ayubi”. After inquiring of Chase Bank of Texas, BPE was informed that the document was a forgery. BPE made a report to the (Spanish) police.

On the 9^th August, 1999, after the theft of the cheque had been discovered, HSBC advised BPE by SWIFT that Linklaters had reported that it had not received the proceeds.

In due course, these proceedings were commenced by Linklaters against both HSBC and BPE, claiming damages for conversion. Although conversion is a tort of strict liability, collecting and paying bankers enjoy statutory defences in relation to both the receipt of the proceeds of a cheque and the payment of a cheque, provided that they have acted “in good faith and without negligence”: see, s.(4)(1) and (2) of the Cheques Act 1957 and s.80 of the Bills of Exchange Act 1882, as amended by the Cheques Act 1992. In the event, however, HSBC and BPE settled with Linklaters; each bank made a payment. It was, I have been told, a term of the settlement that both the total amount paid in settlement and the banks’ respective contributions would remain confidential. For completeness here, nothing turns on the Claimant being Linklaters rather than Zeneca.

As already observed, this trial has been concerned with a dispute between HSBC and BPE, with regard to responsibility as between themselves for the cost of the settlement.

Before outlining the rival cases, something must be said of the banks’ respective roles, which were and ultimately remained common ground.

BPE was banker to UFSC and acted as collecting banker for UFSC in relation to the cheque.

HSBC was banker to Zeneca; it was also BPE’s agent for collection and the paying bank.

In a nutshell, HSBC’s case proceeded as follows. As BPE’s agent for collection, HSBC claims an indemnity against BPE in respect of its liability to Linklaters; alternatively, HSBC claims that it is entitled to recover the entire amount it has paid to Linklaters as damages for breach of warranty. In putting its claim this way, HSBC relies on the decision of Rix,J., as he then was, in Middle Temple v Lloyds Bank [1999] 1 All ER (Comm) 193. Mr. Blair QC, who appeared for HSBC, submitted that Middle Temple was indistinguishable and that I should follow it. The fact that HSBC was the paying bank as well as BPE’s agent for collection was neither here nor there; at most it was a distinction without a difference. Accordingly, HSBC was entitled to an indemnity or damages for breach of warranty as a matter of law, irrespective of whether either HSBC or BPE acted “without negligence” for the purpose of s.4 of the Cheques Act 1957 or s.80 of the Bills of Exchange Act 1882. If wrong in its primary case, HSBC claimed a contribution from BPE, pursuant to the Civil Liability (Contribution) Act (“the 1978 Act”), on the ground that BPE was also liable to Linklaters in conversion for the same loss; it was HSBC’s case on this footing, that BPE was solely, alternatively, overwhelmingly to blame; BPE’s role, through Mr. Ortigosa, was much more extensive and Mr. Ortigosa’s conduct had been “insupportable”. By contrast, at most, Mr. Cooney of HSBC had made an error of judgment in the limited time available to him. Accordingly, BPE must bear all or most of the responsibility for the loss and HSBC’s contribution, if any, should be minimal.

For BPE, Mr. Oditah (as he then was) submitted that Middle Temple had been wrongly decided or had been decided per incuriam; relevant lines of authority had not been drawn to the Court’s attention. In any event, Middle Temple was distinguishable; unlike the position with regard to the relevant bank in Middle Temple, in this case HSBC was not simply BPE’s agent for collection but was also the paying bank. HSBC’s role as agent for collection was lacking in content; instead, its relevant capacity had been as paying bank but, as such, it was entitled to neither an indemnity nor damages for breach of warranty. Accordingly, questions of indemnity or damages for breach of warranty should be put to one side; the correct inquiry concerned claims for contribution pursuant to the 1978 Act. Here, BPE sought a contribution from HSBC by way of a complete indemnity. HSBC’s negligence was the effective cause of Linklaters’ loss; HSBC had paid the cheque without making any inquiry of Zeneca, notwithstanding several “red flags”. Alternatively, HSBC must bear the “lion’s share” of the loss and any contribution from BPE should be minimal. BPE had complied with its own procedures and with Spanish banking law and practice; HSBC, however, had failed to act with due diligence and, not least, had failed to follow its own procedures.

In the light of the rival cases, two principal groups of issues accordingly arise:

Whether HSBC is entitled to the benefit of an indemnity or warranty so that BPE alone should be liable for the Linklaters’ settlement ? (“(I) The Indemnity/Warranty Issues”);

If the answer to (I) is “no”, what, if any, contribution is each of HSBC and BPE entitled to recover from the other in respect of the Linklaters’ settlement ? (“(II) The Contribution Issues”).

(1) The decision in Middle Temple (supra): Rix,J. began his judgment by clarifying the issues before him, as follows (at pp. 195-6):

In summary terms, the facts in Middle Temple were these. Middle Temple drew a cheque, marked “a/c payee only” in favour of its insurers. The cheque was stolen and presented at an Istanbul branch of Sekerbank, a Turkish bank, which asked Lloyds Bank (“Lloyds”) to collect the cheque on its behalf in England. Lloyds collected the cheque and credited the proceeds to Sekerbank. Before the fraud was discovered, the money was withdrawn from Sekerbank and dissipated. Middle Temple sued both Lloyds and Sekerbank for converting the cheque; the two banks sought to rely on the “no negligence” defence provided by s.4 of the Cheques Act 1957 (set out above). In the event of being found liable to Middle Temple, each bank claimed an indemnity or contribution from the other.

Rix,J. held that both Lloyds and Sekerbank were unable to bring themselves within s.4 of the Cheques Act; each was liable to Middle Temple. For present purposes, no more need be said of that aspect of Middle Temple. As regards the banks’ liabilities inter se, with which the present case is directly concerned, the learned Judge’s decision is helpfully summarised in the headnote (at p.194) as follows:

Given the nature of Mr. Oditah’s submissions, it is necessary to study the analysis contained in this part of the judgment in Middle Temple in a little more detail. To begin with (at pp. 231-2), Rix,J. rejected a claim by Sekerbank to an indemnity from Lloyds, whether on the ground of its mandate or on the ground of Lloyds’ breach of duty to it. It is unnecessary to take time with the mandate point. As to the alleged breach of duty, Rix,J. drew a distinction between the liability of Lloyds to the true owner in conversion, having failed in its s.4 defence and the question of any breach of duty owed to Sekerbank. As between Lloyds and Sekerbank, Lloyds had collected the cheque as instructed; the “primary duty” of collecting the cheque for the true owner was upon Sekerbank; that duty could not be passed to Lloyds by asking it to be Sekerbank’s agent for collection. Further, on the evidence of banking practice before him, the learned Judge held that, as between Lloyds and Sekerbank, it was Sekerbank’s duty to ensure that it was collecting for the right customer and true owner.

Rix,J. next turned (at pp. 232-5) to the claim by Lloyds against Sekerbank for an indemnity. This claim was put in two ways: (1) as an agent requested to collect a cheque which did precisely what it was requested to do, Lloyds was entitled to an implied indemnity from Sekerbank against any liability incurred in the course of carrying out its instructions as long as its act was not manifestly tortious; (2) on the basis of an implied warranty that Sekerbank’s customer was entitled to have the proceeds of the cheque paid to him. As already noted, Rix,J. held that Lloyds was entitled to succeed on both these grounds.

The implied indemnity: With regard to the implied indemnity, Sekerbank had argued that there was no good reason why the whole loss should fall on it; given that an agent for collection could only be liable if it acted negligently (it would otherwise be protected by s.4 of the Cheques Act 1957), it would be seeking an indemnity against its own negligence, which was contrary to principle; reference was made, inter alia, to the then current edition of Bowstead and Reynolds on Agency.

Rix,J. rejected these submissions. First, the learned Judge referred to Sheffield Corporation v Barclay [1905] AC 392. In that case, a banker in good faith sent a forged transfer form to the corporation so that it could register the transfer and issue a stock certificate in his name. The true owner of the stock was indemnified by the corporation; the banker was held liable to indemnify the corporation. The Earl of Halsbury LC, cited with approval the “general principle of law”, extracted from Dugdale v Lovering (1875) LR 10 CP 196, at p.397, as follows:

Next, Rix,J. considered Kai Yung v Hong Kong Banking Corpn. [1981] AC 787 (PC). That case, somewhat similar to Sheffield, involved the registration of forged share transfers; the bank was held entitled to an indemnity from the stockbrokers who had requested the transfer. It is noteworthy that Rix,J. went on to cite the following passage from the advice of the Board, delivered by Lord Scarman (at pp. 799-800):

Additionally, Rix,J. reviewed the decision of Saville,J. (as he then was) in Redmond v Allied Irish Banks plc [1987] 2 FTLR 264. In that case, the plaintiff paid into his account with the defendant, two cheques crossed “Not negotiable – account payee only”, payable to a third party; as a consequence of collecting those cheques, the defendant was obliged to compromise an action brought against it by the drawer for conversion of the cheques. Saville,J. expressly doubted the correctness of the concession made by the plaintiff that the defendant was entitled to be indemnified by him; such an assumption appeared to involve agreeing to indemnify the bank against the consequences of its own negligence in agreeing to collect and pay an account payee only cheque in to the account of another.

Rix,J.’s conclusion on the implied indemnity was expressed in the following terms (at pp. 234-5):

The implied warranty: In any event, Rix,J. held that Lloyds was entitled to an indemnity on the basis of the implied warranty in the terms set out above. In his review of the authorities, the learned Judge had noted support for this alternative approach, in particular from Lord Davey in Sheffield (supra), at pp. 402-3 and 404-5 and Lord Scarman in Kai Yung (supra), at pp. 798-9. It may be noted that Lord Davey expressed the point this way (at p.403):

Contribution: Had Rix,J. held that Lloyds was not entitled to rely on an implied indemnity or warranty, then, pursuant to the 1978 Act, he would have apportioned the banks’ liability between themselves in the ratio of Sekerbank 75% and Lloyds 25%. Plainly, this conclusion was fact-specific and cannot be treated as furnishing general guidance.

(2) The correct approach to Middle Temple: As already foreshadowed, Mr. Oditah submitted that Middle Temple was wrongly decided, or had been decided per incuriam, or was in any event distinguishable. While not binding on me, Middle Temple is of course a persuasive authority. Insofar as Middle Temple is distinguishable, no special considerations arise. To the extent, however, that Middle Temple is not distinguishable and is said to be wrong, then particular care is needed here; much the same may be said with regard to the argument that Middle Temple was decided per incuriam, in any event a bold submission given the dramatis personae in that case. It is clear both from what I was told by Mr. Blair and from the opening remarks of the judgment in Middle Temple, that Middle Temple was argued as a “test case” with a view to providing guidance, in particular to English clearing banks. Moreover, Rix,J. heard evidence of banking practice. In such circumstances, conflicting decisions at first instance would be unfortunate in the extreme. With this in mind, whether or not I would necessarily have reached the same conclusions free of any prior authority, it seems to me that I should follow Middle Temple unless persuaded that it was wrongly decided; doubts as to its correctness (if any) are better resolved elsewhere. I turn to Mr. Oditah’s attack on Middle Temple.

(3) Was Middle Temple wrongly decided or decided per incuriam ? It is convenient to deal first with the argument as to the implied indemnity before coming to the implied warranty. For present purposes, I proceed on the following assumptions: (1) Nothing turns on the fact that HSBC was the paying bank, as well as BPE’s agent for collection; the significance, such as it is, of that point, will be considered when addressing the argument that Middle Temple is distinguishable. (2) Both HSBC and BPE were negligent vis-à-vis the true owner of the cheque, a matter to which I must return when dealing with the Contribution Issues. (3) HSBC was not negligent vis-à-vis BPE; an argument that it was will be dealt with when considering whether Middle Temple is distinguishable.

Implied indemnity: Mr. Oditah’s submissions here hinged on the proposition that HSBC was not entitled to an implied indemnity in respect of its own negligence. The distinction drawn by Rix,J., between the agent’s negligence vis-à-vis his principal and the agent’s breach of duty to a third party, was contrary to principle and unsupported by authority. Mr. Oditah relied on Bowstead and Reynolds on Agency (17^th ed.), at para. 7-062, where, under Article 65, it is stated:

I confess that, in the absence of the Middle Temple decision, I would have been considerably tempted by Lord Scarman’s observations in Kai Yung (supra) set out above; at least at first blush, assuming negligence on the part of both HSBC and BPE towards Linklaters in the present case, a solution involving each bank being ordered to contribute towards the settlement in a “just and equitable” amount under the 1978 Act, has much attraction. Moreover, such thoughts are reinforced by the comment on Middle Temple, contained in the current 12^th edition of Paget’s Law of Banking, at para. 23.15:

Notwithstanding these reflections, I am not persuaded that Middle Temple was wrong on the question of the implied indemnity. As already canvassed, conflicting first instance decisions are here to be avoided if at all possible; misgivings as to the result arrived at in Middle Temple are one thing; it is quite another to be persuaded that the decision in Middle Temple cannot be sustained and Mr. Oditah’s arguments fall well short of doing so. My reasons are these:

The argument that the implied indemnity issue in Middle Temple was decided per incuriam, can be summarily dismissed. Quite apart from its inherent improbability (already commented upon), it is plain from a study of the judgment in that case, that the Court had well in mind the extracts from Bowstead and Reynolds (albeit in a prior edition), relied upon by Mr. Oditah here. As the authorities to which Mr. Oditah made reference are all cited in that section of Bowstead and Reynolds, nothing turns on the fact that they were not mentioned by name in the Middle Temple judgment. Furthermore, as has been seen, Rix,J. himself cited the passage from Lord Scarman’s judgment, casting some doubt on the desirability of an outcome in which 100% of the liability came to rest on one only of two negligent banks.

There is force in Mr. Blair’s submission that the authorities relied on by Mr. Oditah (and noted above) are distinguishable. As to the passages in Bowstead and Reynolds (supra) and the principles stated in Frixione (supra), at p.196, these may be said to assume that the liability of the agent only arose by reason of the agent’s fault or, at the least, that the liability of the agent was not the natural and direct consequence of the agent acting on the principal’s request. If anything, the decision in Cory (supra), illustrates the distinction Mr. Blair seeks to draw; in that case it could not be said that the natural and direct consequence of the agent doing the particular act he had been requested to do was the injury to the third party, giving rise to the agent’s liability and his claim for an indemnity; instead, the injury to the third party was caused by the agent’s negligence in the manner in which he performed the request. By contrast, here, provided only that HSBC acted upon the BPE Remittance Letter, it was inevitable that HSBC would commit the tort of conversion. Critically, as between themselves, it did not lie in BPE’s mouth to complain of HSBC’s failure to second-guess BPE’s own instructions contained in the Remittance Letter. Granting that such failure may have deprived HSBC of a defence to a claim by Linklaters, it did not constitute negligence vis-à-vis BPE. Approached in this way, the distinction drawn by Rix,J. between negligence of an agent towards his principal and negligence of an agent towards a third party, is not precluded by principle or authority. It may be, I put it no higher, that some further support for the approach of Rix,J., is to be found in authority drawn from a different area of law: see, Strathlorne Steamship v Andrew Weir (1934) 50 Ll.L.Rep. 187, esp. at p.194, per Romer, LJ. For completeness, the decision in Duncan v Hill (supra), does not assist the argument either way, as it rested on causation grounds.

On the evidence of banking practice available to Rix,J., as between collecting bank and its agent for collection, it was the duty of the collecting bank “to ensure that it was collecting for the right customer and true owner” (Middle Temple, at p.232). That duty, or “primary duty” could not be “passed” by the collecting bank to its agent for collection (ibid, at p.231). It is to be acknowledged that the decision in Middle Temple gives effect to this allocation of responsibility in a manner which an apportionment solution would not.

Furthermore, again as Mr. Blair submitted, whatever the perceived fairness of a solution apportioning liability between the banks, there was much to be said for certainty in this area. Clear rules facilitating the allocation of risk were, he said, of more interest to banks than an uncertain apportionment of liability. Such considerations of policy themselves lend powerful support to the decision arrived at in Middle Temple.

If considerations of certainty and the evidence of banking practice are taken together, they point to the loss resting with one or other of the two banks and the collecting bank rather than its agent for collection being that bank. Viewed in this light, the decision by Rix,J., according as it does with the approach of Lord Davey in Sheffield (supra) at p.405, is difficult to fault.

Implied warranty: Here, Mr. Oditah’s attack on Middle Temple proceeded as follows. First, he relied on the well-established principle that a person presenting an instrument for payment or acceptance gives no warranty as to its authenticity or genuineness or that of the documents attached to it: see, Chalmers & Guest on Bills of Exchange, 15^th ed., at para. 1136; The East India Company v Tritton (1824) 3 B&C 280; Leather v Simpson (1871) LR 11 Eq 398; Guaranty Trust Co. of New York v Hannay [1918] 2 KB 623; and Greenwood v Martins Bank Ltd. [1933] AC 51. None of these cases had been cited in Middle Temple. Secondly, there was no distinction between a warranty of genuineness, on the one hand and a warranty as to entitlement to the proceeds of the cheque, on the other; alternatively, this was a distinction without a difference. If, accordingly, a warranty of genuineness could not be asserted, then Rix,J. was wrong in concluding that there was a warranty by Sekerbank that its customer was entitled to the proceeds of the cheque. In this regard too, Mr. Oditah underlined that Lord Davey in Sheffield (supra), at p.403 and Lord Scarman in Kai Yung (supra), at p.799, when discussing the question of a warranty, had both spoken of the genuineness of the documents in question. Thirdly, the implication of a warranty was not automatic; in the present context there was no or no satisfactory factual basis for its implication.

Mr. Blair’s response was succinct. Those involved in the Middle Temple case had not missed the point. HSBC did not quibble with the line of authorities relied on by Mr. Oditah; the cheque here was in any event genuine. The warranty which Rix,J. held to exist and on which HSBC relied here was a different warranty, namely, that BPE’s customer was entitled to the proceeds of the cheque. Further, as it was put in HSBC’s written closing submissions:

Here too, were I deciding the present case de novo (as it were), I might well have hesitated before concluding that there was an implied warranty as to entitlement to proceeds. In the present context, I might have questioned the adequacy of the factual basis for the implication weighed against the attraction of fashioning a solution having the effect of apportioning liability between the two banks. Moreover, I might have ventured to doubt the substance of the distinction between a warranty of genuineness on the one hand and a warranty of entitlement to proceeds on the other.

All that said, I am again not persuaded that the decision in Middle Temple was wrong. I regard it as inconceivable that those concerned in Middle Temple did not have the Hannay (supra) line of authorities in mind; I therefore reject the notion that the decision in Middle Temple was arrived at per incuriam. Once this stage is reached, it can readily be said that the position is different as between the collecting bank and its agent for collection on the one hand and that relating to the holder presenting a bill for payment or acceptance on the other. Furthermore, once the position between the principal (collecting bank) and its agent for collection falls to be considered, the commonsense approach favoured by Rix,J. is persuasive indeed. To the question posed by Rix,J. at p.235 of his judgment (set out above), what answer could properly have been given other than the one which the learned Judge gave?

Interim conclusion: In the circumstances, I am accordingly minded to follow Middle Temple on both the implied indemnity and implied warranty issues. Notwithstanding the countervailing attractions of a solution based on a just and equitable apportionment under the 1978 Act, it is one which is inherently uncertain and carries with it a much increased risk of litigation; that is an expensive price to pay. By contrast, a settled rule of risk allocation between collecting bank and its agent for collection, supported by evidence of banking practice as to the proper location of the duty or primary duty in question, enjoys considerable practical advantages. As a decision to follow Middle Temple on either the implied indemnity or the implied warranty issue is sufficient for HSBC, it follows that HSBC must succeed in its claim to a complete indemnity from BPE, unless Middle Temple can be distinguished. To that topic, I turn next.

(4) Is Middle Temple distinguishable ? Implied indemnity: Mr. Oditah submitted that even if Rix,J. was right to find an implied indemnity in Middle Temple, that decision was distinguishable here (1) because HSBC was the paying bank which Lloyds had not been in Middle Temple; and (2) HSBC was in any event in breach of its duty towards BPE. I shall consider these arguments in turn.

HSBC as paying bank: Although from time to time Mr. Oditah appeared reluctant to accept it, he ultimately (and rightly) did not seek to go behind the common ground that in this case, HSBC was both BPE’s agent for collection and the paying bank. In its final form, Mr. Oditah’s argument was that HSBC’s role as agent for collection was lacking in content; its relevant capacity was that of paying bank. It was as paying bank that HSBC had incurred liability to Linklaters and been sued by Linklaters. Moreover, HSBC had characterised its own role as that of the paying bank before these proceedings were commenced; for example, an internal memorandum of a meeting held on the 3^rd November, 1999, attended by HSBC, Linklaters, Zeneca (and its legal representatives), records that:

For his part, Mr. Blair submitted that the two capacities in which HSBC had acted could not be artificially divided in the manner suggested by Mr. Oditah. In any event, HSBC’s role as agent for collection was one of substantive importance; it could not, for example, be assumed that if some other bank had been the agent for collection that the cheque would have reached HSBC (as paying bank) in the same way; the cheque may well have come to HSBC via the clearing system. In such circumstances, the paying bank would not have been concerned with the destination of the funds or any endorsements on the cheque. Further and in any event, it was not the payment of the cheque as such but the crediting of the proceeds to the account of a party not entitled to the proceeds that resulted in HSBC’s liability in conversion. Accordingly, HSBC’s loss had arisen in the course of, or by reason of carrying out BPE’s instructions; because HSBC, on BPE’s instructions, remitted the proceeds of the cheque to BPE, it incurred liability in conversion to Linklaters. On this analysis, the fact that HSBC was also the paying bank is neither here nor there. It was irrelevant how Linklaters characterised HSBC’s role; Linklaters may have had its own reasons for doing so. Finally and for what it is worth, HSBC had been paid a commission of £11; it would not have charged a commission as paying bank.

With respect to Mr. Oditah’s arguments, I have a clear preference for those of Mr. Blair on this point. To begin with, contextual considerations lend support to Mr. Blair’s submissions. It is very rare, as Mr. Blair submitted, for a paying bank to be sued for conversion of a cheque. Moreover, the cheque in question was a crossed cheque. As Bigham, J. put it, in Akrokerri Mines v Economic Bank [1904] 2 KB 465:

To my mind, the decisive point here in HSBC’s favour is that, quite simply, its role as BPE’s agent for collection did not lack content. To the contrary, the true analysis is that HSBC incurred liability in conversion when, on and in accordance with BPE’s instructions, it credited BPE’s account with the proceeds of the cheque. That it did as BPE’s agent for collection. The fact that HSBC was, in addition, the paying bank is neither here nor there; its liability to Linklaters did not arise before it credited BPE’s account with the proceeds of the cheque in its capacity as agent for collection: see, by analogy, Marfani v Midland Bank [1968] 1 WLR 956, at pp. 974-5, per Diplock,LJ, as he then was. It follows that Middle Temple cannot be distinguished on the ground that HSBC was the paying bank as well as BPE’s agent for collection.

For completeness:

How Linklaters characterised HSBC’s role cannot be determinative;

HSBC’s own decision to charge a commission can likewise not be determinative;

The thinking revealed by HSBC’s internal memorandum is relevant but has been overtaken by later analysis;

Whether or not, as paying bank, HSBC was entitled to an implied indemnity is academic; as already observed, Mr. Oditah forcefully contended that it was not; Mr. Blair sought to mount an argument that it was; it is unnecessary to say more of these contentions.

HSBC in breach of duty owed to BPE ? I turn next to Mr. Oditah’s argument that Middle Temple could be distinguished on the ground that HSBC had been negligent towards BPE, its principal. Two allegations were advanced in this connection. First, that HSBC had failed to read its instructions before acting upon them. Secondly, that HSBC had failed to advise BPE of the meaning and significance of the “a/c payee only” crossing. In my judgment, neither of these points assists BPE; this suggested basis for distinguishing the present case from Middle Temple accordingly fails. My reasons follow.

HSBC’s instructions were contained in the Remittance Letter. The submission that these were not read by HSBC is plainly contradicted by the evidence. According to Mr. Cooney and not or not seriously challenged, Ms. Burke (the foreign desk clerk, referred to earlier) prepared the 18^th May, 1999 letter (also noted above) authorising settlement of the cheque. The details in that letter can only have come from the Remittance Letter. It follows that Ms. Burke must have read the Remittance Letter. Likewise, as the evidence from Mr. Rose of HSBC’s Cheque Processing Department made clear, staff in that Department must have read the Remittance Letter to obtain from it information found in the computer entries relating to the processing of the cheque. No more need be said of this submission.

I come next to HSBC’s alleged failure to advise BPE of the meaning and significance of an “a/c payee only” crossing. For the reasons given by Rix,J. in Middle Temple (at pp.231-2), drawing on the judgment of Saville,J. in Redmond (supra), at least absent an express request to do so, HSBC owed no such advisory duty to BPE:

Implied warranty: Here, Mr. Oditah submitted that Middle Temple was distinguishable by reason of: (1) HSBC being the paying bank; (2) an express disclaimer.

HSBC as paying bank: Mr. Blair submitted that with regard to the question of an implied warranty, the capacity in which HSBC incurred liability was irrelevant; there either was or was not an implied warranty; if there was, then the inquiry was confined to whether or not there had been a breach of it. With respect, I have reservations as to this argument, in that the capacity of HSBC would or might impact on whether a warranty should be implied. Be that as it may, nothing turns on those reservations. For the same reasons as I have already sought to express in connection with the implied indemnity, HSBC’s additional role as paying bank is not a ground for distinguishing the present case from Middle Temple.

Express disclaimer: Mr. Oditah noted that Rix,J., in Middle Temple had held that there was an implied warranty, absent “some express disclaimer”. In the present case, unlike Middle Temple, he submitted that there was such a disclaimer. The Remittance Letter provided that the instructions therein were to be executed in accordance with the URC. Art. 13 of the URC provides as follows:

So far as it goes, I accept that no question concerning Art. 13 of the URC arose in Middle Temple. That said, Mr. Oditah’s argument in support of Art. 13 serving as an express disclaimer is essentially the same as his argument that BPE gave no implied warranty. Both arguments turn on there being no distinction between a warranty of genuineness and a warranty of entitlement to the proceeds of a cheque. Having already concluded that I would follow Middle Temple on the implied warranty question, it follows that I cannot accept Mr. Oditah’s argument here. Art. 13 of the URC is a disclaimer as to the genuineness of the documents; it does not impact on the different warranty, namely that BPE’s customer was entitled to the proceeds of the cheque.

Conclusion: Pulling the threads together, the present case is not properly distinguishable from Middle Temple, either as to implied indemnity or as to implied warranty. Necessarily therefore, in the light of my earlier conclusion that Middle Temple was to be followed unless distinguishable, HSBC is entitled to succeed in its claim for a complete indemnity from BPE in respect of its liability to Linklaters.

(5) Miscellaneous matters: For completeness, I must record here two further matters canvassed in connection with the Indemnity/Warranty Issues.

The BPE stamp on the cheque: It will be recollected that BPE stamped on the back of the cheque wording, in Spanish and English, which included “PRIOR ENDORSEMENTS GUARANTEED”. Mr. Blair submitted that the words meant what they said and constituted an express indemnity; BPE assumed responsibility for the instrument to other banks in the payment chain. Mr. Oditah contended that the wording meant no more than that BPE had examined the (purported) endorsements on the cheque and there was no apparent break in the chain of endorsements; the wording further confirmed that BPE identified the person presenting the cheque. Beyond that the wording did not go; it did not constitute an indemnity. In the light of the decision to which I have already come, this matter is academic; I shall therefore take it rather more shortly than would otherwise have been the case but, even so, it does not permit truly summary treatment.

On this issue, I prefer Mr. Oditah’s arguments to those of Mr. Blair. My reasons are these:

Both parties adduced expert evidence of Spanish banking law and practice in connection with the interpretation of this wording. Neither party advanced, let alone pressed, the submission that I should simply proceed to construe the English wording, even though by this stage the cheque had been put into circulation internationally. With some hesitation, I shall follow the approach favoured by the parties.

I shall have to return to the experts on Spanish banking law and practice in due course but it is necessary to introduce them at this stage. HSBC called Mr. Mezquita; he had some 27 years’ experience with Citibank, covering the operations of the bank and a particular involvement with compliance, including money laundering; he did not have any expertise in marketing, retail management or international cheque collection. He was not a lawyer. He was, if I may say so, a highly intelligent witness but his evidence must be considered against the background both of his particular perspective and the limitations on his expertise. BPE called Professor Curto; he was a lawyer and, indeed, the author of a work on the Spanish Exchange and Cheques Act 1985 – the principal Spanish legislation dealing with cheques and other bills of exchange (“the 1985 Spanish Act”). His experience, extending to very senior positions at Banco March and Banco Natwest, lay in the legal and administrative (secretarial) areas; he had, for instance, never worked in a branch. While his evidence was not, with respect, always easy to follow, it was clear that he had very considerable experience, albeit again within the limits of his expertise. As was to be expected, both Mr. Mezquita and Prof. Curto sought to assist the Court to the best of their abilities.

Given that the meaning of the stamp arises in the area of cheque collection, my instinctive reaction is that this was more a matter for Prof. Curto than Mr. Mezquita. Indeed, there was some force in Mr. Oditah’s submission that Mr. Mezquita could not strictly speaking offer an expert opinion on this point. I shall nonetheless go on to consider the evidence of each expert on its merits.

Mr. Mezquita’s opinion was that a bank which stamped such wording on a cheque was guaranteeing not only the regularity but also the effectiveness of prior endorsements; in essence, on the basis of the bank’s knowledge of its customer, it was taking upon itself the risk as to the effectiveness of prior endorsements even though it did not know the previous endorsers. The stamp was in Spanish practice a standard stamp used for international cheques. Mr. Mezquita, however, was not aware of any case where a Spanish bank had been held liable by virtue of the stamp.

As a matter of commercial risk allocation, I can well understand Mr. Mezquita’s opinion. However, I do regard it as somewhat surprising that if the stamp is in standard use and carries the meaning which Mr. Mezquita suggests, there are no instances of Spanish banks incurring liability thereunder, at least so far as Mr. Mezquita’s knowledge extends. That surprise causes me at least to question the correctness of Mr. Mezquita’s opinion on the meaning of the stamp.

Turning to Prof. Curto’s evidence, he gave, in his evidence in chief, a number of reasons in support of his view that the stamp did not give rise to an indemnity. First, the absence of any requirement that previous signatures should be notarised. Secondly, the fact that guarantees require formalities absent here. Thirdly, the fact that under Spanish banking regulations, guarantees have to be recorded in a particular manner and that cheques bearing the stamp wording are not so recorded. Fourthly, that an endorser normally guarantees payment only to subsequent holders of the cheque if the cheque is dishonoured which was not the case here. Fifthly, that it made no commercial sense for a bank receiving a relatively small commission for collecting a cheque (I was told that BPE’s commission was less than £1,000) to take upon itself the entirety of the risk of the cheque, at least without any security.

At first blush, my impression was that Mr. Blair had enjoyed considerable success in cross-examination. As it seemed to me at the time, Prof. Curto accepted in cross-examination that, as regards the last endorsement, the stamp was a guarantee of authenticity (or effectiveness). If that was the true import of Prof. Curto’s answers in cross-examination, it would go a long way towards undermining the reasoning he relied on in support of his opinion. It would also be difficult to reconcile with the opinion which he repeated while still under cross-examination, namely, that by reason of the stamp, “the bank is not entering into any risk, not undertaking any risk”.

In re-examination, the following exchange took place between Mr. Oditah and Prof. Curto:

I have anxiously sought to consider Prof. Curto’s evidence on this topic, taken as a whole. In the event I have been persuaded by Mr. Oditah, in his final oral submissions, that the true interpretation of Prof. Curto’s answers was that, with respect to the final signature, the wording of the stamp signifies that the bank has verified the identity of that signatory but not the authenticity of that signatory’s endorsement.

On this footing, Prof. Curto’s evidence on the stamp wording forms a consistent whole; as such, I prefer it and Mr. Oditah’s submissions to Mr. Mezquita’s evidence and Mr. Blair’s argument here. Viewed in the context of Spanish banking law and practice, I regard it as implausible that a standard stamp should have such far-reaching consequences as HSBC’s case must entail. I am not persuaded that Mr. Mezquita’s evidence provides a proper foundation for a finding of that nature.

Accordingly, had it mattered, HSBC would have failed in its case of an express indemnity derived from the wording of the stamp.

Art. 11(c) of the URC: Art. 11(c) of the URC provides as follows:

My provisional inclination was to favour Mr. Blair’s argument here. I have already rejected Mr. Oditah’s capacity point. Assuming that Middle Temple is good law, the reasoning there as to negligence ought to assist Mr. Blair here. That said, the point is potentially one of some wider significance, going to the construction and scope of the URC and it is not necessary for me to decide it. In the circumstances, I prefer to express no concluded view on this point. Had it been necessary to do so, I would have wished to reflect further on the impact of negligence on the construction of a set of international rules and on the question of whether the true scope of Art. 11(c) was limited to such matters as foreign taxes and the like. To my mind, questions of that nature are best left until a case arises where it is necessary to decide them.

In the light of my decision on the Indemnity/Warranty Issues, this group of Issues does not strictly arise. Nonetheless, I have heard evidence on these Issues, they have been fully argued and it is appropriate for me to decide them.

The Contribution Issues are conveniently dealt with under the following headings:

(1) Fault of HSBC;

(2) Fault of BPE;

(3) The legal framework;

(4) Apportionment.

(1) Fault of HSBC: Reference has already been made to Mr. Cooney, an authorised signatory at the HSBC King Street branch, who authorised settlement of the cheque. The BPE case was that Mr. Cooney was negligent in not making further inquiries as to the cheque; such negligence was both causative of the loss and seriously culpable.

Mr. Cooney gave oral evidence at the trial; he had some 30 years experience at HSBC and said that he carried out his work meticulously. His diligence in general, which I have no reason to doubt, does not, however, resolve the issue which I need to determine here.

Mr. Cooney obviously could not remember the individual cheque. He was, however, very clear as to the procedures which were usually followed and his answers must be interpreted as reconstruction based on his usual or even invariable practice. Turning to such practice and procedures, Mr. Cooney explained that the King Street branch had some 40 authorised signatories of which he was one. About 10 cheques would have been referred to him on any one day. Ms. Burke (the foreign desk clerk) would have carried out routine or commonsense checks, such as whether the words and figures tallied. Because the amount of the cheque exceeded £50,000, Ms. Burke would have brought the cheque to Mr. Cooney, so that a “second pair of eyes” could “look at the transaction as a whole”. As Mr. Cooney explained it, this look at the “larger transaction” involved a focus on the front of the cheque, in the light of his knowledge of the customer, before making a judgment, based on his experience, as to whether further inquiries should be made. In the present case, Mr. Cooney had not thought it necessary to make further inquiries; his reasons were these:

Mr. Cooney was not required to look at the back of the cheque nor at the Remittance Letter – although, as already summarised, it is plain that the Remittance Letter was read by other members of the HSBC staff (including Ms. Burke) and the Remittance Letter was with the documents supplied to him. As to HSBC’s procedure manuals, Mr. Cooney understood that their function was to provide guidance; authorised signatories would be “ill-advised” to ignore such guidance; if the manuals state that certain features were suspicious, an authorised signatory should consider them.

Mr. Oditah, cross-examining, took Mr. Cooney to the following section contained in HSBC’s procedure manuals:

….

Special presentations

Cheques collected abroad

High value cheques dated some while ago – such cheques are normally presented for payment without delay.”

Linklaters, HSBC and BPE had all instructed experts on English banking practice, messrs. Hedley, Trower and Harrison, respectively. The measure of agreement between them was such that the parties sensibly dispensed with calling them; their written reports and, most significantly, their Joint Memorandum (“the Joint Memorandum”) were before the Court. It is appropriate to quote from the Joint Memorandum at some length:

In my judgment, in the light of the Joint Memorandum, there is an overwhelming case that HSBC, through Mr. Cooney, was negligent with regard to a failure to make inquiries of Zeneca in connection with the cheque. The test of negligence is objective; while understanding Mr. Trower’s sympathetic consideration of Mr. Cooney’s position, the facts of this matter cried out for further investigation, including a thorough examination of the Remittance Letter and, in consequence, inquiries being made of Zeneca. I agree with Mr. Hedley and Mr. Harrison on that point. The grounds for such investigation appeared from the HSBC procedure manuals themselves, as highlighted in para. 2 of the Joint Memorandum. These circumstances ought plainly to have called into question Mr. Cooney’s (proper) starting assumption, namely that BPE was collecting the cheque on behalf of the payee – an assumption which would not have survived an investigation leading to a thorough examination of the Remittance Letter. The experts, finally, do not appear to have shared Mr. Cooney’s view that this was not a special presentation; as to special presentations in excess of the branch counter limit (which this cheque was), the manuals provide that they were to be referred to an authorised signatory “who must ensure all necessary investigations are made to be satisfied the transaction is in order”. That is precisely what Mr. Cooney ought to have done.

These conclusions are sufficient for BPE’s charge of negligence against HSBC to succeed. Moreover, it would not be right to go further than the experts on English banking practice on this point. Nonetheless, I feel bound to record concern that the HSBC system was such that alarm bells failed to ring even though the Remittance Letter made it clear that this “a/c payee only” cheque (rendered non-transferable by the Cheques Act 1992) was being collected on behalf of a party other than the payee. For my part, if untutored by the experts on English banking practice, that fact, appearing as it did on the Remittance Letter, read as that was by two branches of HSBC, ought by itself to have triggered off further investigations. In fairness, that does not appear to be the route of reasoning followed by the Joint Memorandum. It is not for the Court to devise improvements to HSBC’s system but it is very much to be hoped that this lacuna will be addressed.

Be that as it may, the negligence established on HSBC’s part was undoubtedly a cause of Linklaters’ loss. HSBC should not have paid the cheque and credited BPE’s account, at least without making contact with Zeneca. Had HSBC made inquiries of Zeneca, in all probability the fraud would have been uncovered and Linklaters would not have suffered any loss.

For completeness:

I reject the submission that before HSBC paid the cheque, BPE had inquired of HSBC regarding the validity of the cheque. The principal BPE evidence in this regard was the statement evidence of Ms. Villavieja; she did not attend to give oral evidence. By contrast, Mr. Geraci of HSBC who had made a statement, denying any personal knowledge of such an inquiry and casting doubt on its likelihood, did attend court. He was not cross-examined. At most, in my judgment, BPE may have made an inquiry as to fate, rather than as to the cheque’s validity. Nothing turns on such an inquiry as to fate.

It will be recalled that, in Middle Temple, Lloyds was criticised for having failed to advise its correspondent banks that the Cheques Act 1992 had rendered a/c payee (or a/c payee only) cheques non-transferable. To the extent that the contrary was argued, there is no basis for criticism of HSBC in this regard. I accept the evidence of Mr. Rose that in 1992, HSBC’s policy was to circularise all its correspondent banks (of which BPE was one) as to the effect of the 1992 Act. Given the lapse of time, it is perhaps not surprising that the actual letters can no longer be found. That said, in the present case, there was evidence that, at all material times between April and August, 1999, BPE was unfamiliar with the impact of this change brought about by the 1992 Act; I have no reason to doubt that evidence, not least as the position in Spanish law is different. It may be that the HSBC 1992 letter was lost in the post or, for whatever reason, did not reach BPE; at all events, in all the circumstances, I would not fault BPE either in this respect. Other than that the discussion of BPE’s alleged fault(s) must proceed on the basis that BPE was unfamiliar with the status of a/c payee only cheques in English law, no more need be said of this point.

(2) Fault of BPE: It was HSBC’s case that BPE and, in particular, Mr. Ortigosa (already mentioned above), had been negligent in respect of: (A) account opening; (B) collection of the cheque; (C) withdrawal of the proceeds.

(A) Account opening: I begin with Mr. Ortigosa’s evidence. In a nutshell, his evidence was that he and BPE had complied with the requisite formalities and procedures for opening UFSC’s account(s) with the bank; without the benefit of hindsight, he and the bank could not have been expected to do more. There was, in the event, comparatively little dispute as to what Mr. Ortigosa had done or not done; the real question, as will be seen, was whether he should have done more.

Mr. Ortigosa explained that he had been introduced to Mr. Giammello by Mr. Martin, then a well-respected customer of BPE; Mr. Ortigosa was, however, unaware that already in 1998, Mr. Martin’s own financial position may have been somewhat precarious, as evidenced by the existence of enforcement proceedings brought against him or his companies by various other banks. As to the time scale, although Mr. Ortigosa in his evidence said that Mr. Giammello had regularly visited the branch from about February 1999, I think he must be mistaken in that regard. In the report made by BPE to the Spanish police in July 1999 (referred to earlier), there is a reference to the introduction of Mr. Giammello by Mr. Martin having taken place some “two months ago”; that would place Mr. Ortigosa’s first meeting with Mr. Giammello in about May. I accept that evidence; it is contained in a report to the police and so is likely to have been given with care, it is relatively contemporaneous and it is inherently likely that Mr. Giammello would not have initiated his contacts with BPE until after the theft of the cheque (in or about late April or early May). I find that Mr. Ortigosa’s first meeting with Mr. Giammello probably took place at the end of April or the very beginning of May, 1999. It follows that I am unable to accept Mr. Ortigosa’s account of frequent meetings with Mr. Giammello, for which in any event there were no notes or records; in this regard, I formed the view that Mr. Ortigosa’s evidence mistakenly overstated the extent of his acquaintance with Mr. Giammello as at May, 1999.

At all events, when Mr. Giammello indicated an interest in opening an account for UFSC with BPE, he was required to produce his passport, UFSC’s incorporation documents and the resolutions authorising Mr. Giammello to act on its behalf. As to Mr. Giammello’s passport, it was an Italian passport, issued as recently as the 8^th April, 1999 by the Italian consul in Barcelona and stated that Mr. Giammello was resident in South Africa. The incorporation documents disclosed that UFSC was a Puerto Rican company. According to Mr. Ortigosa’s witness statement:

The documents supplied by Mr. Giammello were authenticated and thereafter reviewed and validated by BPE’s in-house legal department. These processes would have taken something like a week or more. When the UFSC US$ account was then opened on the 14^th May, the form was signed by two representatives of BPE – not Mr. Ortigosa alone. The UFSC £ sterling account was opened to avoid UFSC having to pay charges for converting the cheque proceeds into US$. No other inquiries were made by Mr. Ortigosa. In cross-examination, he said this:

I have already referred to Mr. Mezquita and Prof. Curto, the experts on Spanish banking law and practice, called by HSBC and BPE respectively. Having regard to their opinions and the submissions of counsel, a considerable measure of common ground may be discerned in relation to Mr. Ortigosa’s evidence:

BPE’s procedures prohibited the opening of “spontaneous” or “impromptu” accounts, i.e., accounts not related to a scheduled commercial transaction or where a new account holder has not been introduced by an employee or bona fide customer. The UFSC account was not a “spontaneous” account, by reason of Mr. Martin’s introduction. Accordingly, Mr. Ortigosa had not contravened this prohibition.

BPE complied with the formalities required by its own internal procedures for the opening of non-spontaneous accounts.

Save with regard to one disputed matter as to the Spanish Money Laundering Regulations, promulgated pursuant to Law 19/1993 (“the money laundering regulations”, see below), in opening the UFSC accounts BPE had complied with the formalities of Spanish law and regulations.

In his final oral submissions and for the avoidance of any misunderstanding, Mr. Blair made it clear that HSBC’s case did not involve criticising BPE as an institution, BPE’s procedures or (of course) the provisions of Spanish law or regulations. Instead, HSBC’s case went to what had happened at the branch in Las Palmas, in 1999.

Against this background, two questions must be resolved:

Whether, as a matter of reasonable and prudent banking practice, BPE should, in the circumstances, have declined to open an account for UFSC without making further inquiries ? (“Prudence”)

Whether BPE was in breach of Art. 3(4) of the money laundering regulations ? (“Art. 3(4)”)

Prudence: In approaching this inquiry, I bear very much in mind that a bank’s primary interest lies in doing business, rather than in deterring potential customers by interrogating them at the stage when they seek to open an account. Plainly, standards must not be set at an unrealistic level. Furthermore, hindsight is to be excluded. Inevitably, the opening of the UFSC account will have been one amongst a number of transactions dealt with in the branch at the time in question. Nevertheless, having made all these allowances, I am amply satisfied that BPE, through Mr. Ortigosa, was at fault in not having made any further inquiries of UFSC before opening its account. My reasons follow.

There was, here too, a degree of common ground between the experts as to the approach to be followed if not (insofar as this was a matter for the experts at all) as to the application of that approach to the facts of the present case. There was no or no real dispute that importance could properly be attached to personal recommendations, at least from an independent source as distinct from an interested party; likewise, that trust lay at the heart of banking relationships. Still further, the experts agreed that even absent specific procedures or guidelines, there are occasions when further inquiries should be made at the account opening stage.

In his report, Prof. Curto put the matter this way:

For his part, Mr. Mezquita accepted in cross-examination that banking practice was built around legal requirements; that said, the law set the minimum standards; the requirement to exercise “due diligence” applied, regardless of the specific terms of any law. As Mr. Mezquita expressed it in his report, the basic rule of sensible banking was “know your customer”. Due diligence in knowing your customer would, in certain cases, require additional inquiries to be made. Such a requirement was not unrealistic. In cross-examination, Mr. Mezquita explained that the need for further inquiries would not apply to 95% of accounts opened and continued as follows:

Was the present one of those exceptional or 5% of cases where further inquiries should have been made ? I think it plainly was.

Insofar as the experts’ views on this topic matter, I have a clear preference for Mr. Mezquita’s evidence. His experience (see above) is more relevant; unlike Prof. Curto, Mr. Mezquita had first hand contact with day to day banking activities. Nor do I think, with respect to Mr. Oditah’s suggestions to the contrary, that Mr. Mezquita was advocating a counsel of perfection, given his expertise in compliance, or that his experience was skewed because he had worked with Citibank rather than a variety of Spanish banks.

In any event, the facts speak for themselves. It is, to my mind, remarkable that no further inquiries were made as to UFSC’s business, its financial statements or its previous or South African banking facilities. Nothing at all of substance was known about Mr. Giammello or UFSC. Here then was an Italian national, an officer of a Puerto Rican company about to open an account in Las Palmas for the purpose of divesting the company of South African assets. It was plain from the outset that the sums involved were to be substantial; they had to be, given that the stated purpose was investment in a venture concerning luxury hotels. The mix of nationalities, the unknown history of Mr. Giammello and UFSC, the amounts involved, all pointed to at least some further inquiries. Insofar as Mr. Martin’s introduction is relied on in order to explain why BPE was not put on inquiry, this explanation cannot withstand analysis. First, BPE’s knowledge of Mr. Martin was in itself superficial; Mr. Ortigosa did not, as already noted, know of Mr. Martin’s own difficulties. Secondly, Mr. Martin was, according to Mr. Ortigosa’s oral evidence, an interested party; Mr. Giammello was the partner Mr. Martin had been looking for to pursue his construction project. In any event, whatever comfort BPE took from Mr. Martin’s introduction, it ought to have been outweighed by the warning signs flashing all too clearly from the remaining facts of the matter.

I accordingly answer the present question by saying that BPE should have declined to open an account for UFSC without making further inquiries; its conduct in doing so was negligent. Had such further inquiries been made, I infer and conclude that no account would have been opened by BPE for UFSC. BPE’s negligence in this regard was accordingly a cause of the Linklaters’ loss. HSBC’s case in connection with account opening succeeds.

Art. 3(4): In the light of the conclusion to which I have come on “prudence”, this inquiry is academic. I propose therefore to deal with it summarily.

Art. 3(4) of the money laundering regulations provides as follows:

HSBC’s case was that Mr. Giammello was not acting for his own account; he was instead acting for the account of UFSC. Accordingly, BPE came under a duty, pursuant to Art. 3(4), to gather the necessary information as to the identity of the beneficial owners of UFSC. Its failure to do so, constituted negligence. Broadly speaking, Mr. Mezquita’s evidence supported the HSBC case.

BPE’s answer was that Art. 3(4) was inapplicable to companies; UFSC was applying to open an account; it was acting for itself. The identity of its shareholders was irrelevant. Art. 3(4) was essentially aimed at nominee transactions. Alternatively, Art. 3(4) was only engaged in respect of holding companies, shell companies or trusts established in a tax haven; UFSC was not such an entity. The BPE case was supported by Prof. Curto’s opinion.

On this point (even assuming that the money laundering regulations were generally applicable to the dealings between Mr. Giammello and BPE), I have not been persuaded by HSBC that Art. 3(4) applies to companies. First, as to the evidence, this is a matter of law or regulation, falling within Prof. Curto’s rather than Mr. Mezquita’s area of expertise. Secondly, BPE’s more limited construction still leaves a sensible meaning to Art. 3(4). Thirdly, if the construction favoured by HSBC was right, the ramifications of Art. 3(4) would not stop with entities such as UFSC and would be altogether more wide-ranging. Granting the good sense of money laundering regulations focussing on beneficial ownership rather than paper formalities, I would be reluctant to accede to HSBC’s proposed construction of a foreign law or regulation, without cogent foreign law evidence in support; as already remarked, such a foundation is lacking here. I therefore reject the HSBC submission that BPE was in breach of Art. 3(4).

(B) Collection of the cheque: The facts as to the collection of the cheque may be very shortly summarised. Mr. Giammello handed Mr. Ortigosa the cheque, saying that it represented the first tranche of proceeds extracted from the sale of UFSC’s South African textile and real property assets. Mr. Ortigosa’s statement evidence was that he had no reason to doubt this explanation.

The cheque was a sterling cheque, drawn on a bank in the United Kingdom, payable not to the vendor, UFSC, but indorsed in blank by an unknown payee. Mr. Ortigosa made no inquiries.

In cross-examination, Mr. Ortigosa said that receipt of high value cheques in the branch was not uncommon; the endorsement of cheques in Spain was “normal”; he continued as follows:

Before proceeding further, a number of matters may conveniently be mentioned and then put to one side:

As already explained, Mr. Ortigosa and BPE are not to be criticised for their unfamiliarity with the significance of the crossing “a/c payee only”.

BPE cannot derive any assistance from its alleged inquiry of HSBC as to the validity of the cheque; for reasons already given, I have rejected that allegation.

In his internal report to regional management dated 11^th August, 1999, Mr. Ortigosa stated that prior to sending the cheque for collection, he had sent a copy of it by fax to the regional foreign department, “to enable them to establish its authenticity”. I confess that by the end of Mr. Ortigosa’s evidence, his use of the word “authenticity” remained a puzzle; at least as a matter of English (if in translation), it implies that he had some doubt in this regard. However, if that be right, then it would follow that Mr. Ortigosa had proceeded to deal with the collection of the cheque and, later, the withdrawal of the proceeds, notwithstanding his own doubts as to UFSC’s entitlement to them. If so, then inescapably, much of Mr. Ortigosa’s evidence would be untruthful. It would, however, not be right to reach so grave a conclusion on the basis of what may be no more than a linguistic quirk in translation and I decline to do so.

There was no dispute that as to the formalities of collection, BPE complied with standard Spanish banking practice. Mr. Ortigosa reviewed the regularity and continuity in the series of endorsements; in the circumstances, he was entitled at least prima facie to assume, in accordance with Art. 125 of the 1985 Spanish Act, that Mr. Giammello was the rightful holder. Further, Mr. Ortigosa obtained Mr. Giammello’s signature on the back of the cheque, which (for what that was worth) matched his specimen signature. Finally, the proceeds of the cheque were only to be credited to UFSC’s account after they had been received from the drawee bank.

Against this background, I come to the nub of the dispute as to the collection of the cheque: whether as a matter of reasonable and prudent Spanish banking practice, BPE should in the circumstances have declined to collect the cheque without making further inquiries?

A number of preliminary observations should be made, as to the approach to be adopted to this question. First, it is Spanish not English banking practice which is relevant. Secondly and generally, as already recorded, there was a large measure of agreement between the Spanish banking experts as to the need for further inquiries to be made, at least in exceptional cases. I did not understand such agreement to be inapplicable to the collection of cheques; nor was it so contended in BPE’s final written submissions. Thirdly, beyond such agreement and the common ground as to BPE’s compliance with the formalities of collection, I am not sure that expert evidence assists on the application of the principles to the individual facts of the case; were it otherwise, I would have accepted from Mr. Oditah that this is an area on which Prof. Curto can and Mr. Mezquita (strictly) cannot give expert evidence – Mr. Mezquita having disclaimed expertise in the field of collection.

As it seems to me, the question of whether BPE should have declined to collect the cheque without making further inquiries stands or falls with the decision on the prior topic of account opening. This conclusion is reinforced when it is recollected that the presentation of the cheque for collection and the opening of UFSC’s US$ account took place on the same day.

If, as I have found, BPE was negligent in opening an account for UFSC without making further inquiries, then I have no doubt that its conduct in collecting the cheque, likewise without further inquiry, discloses additional negligence. There is a certain artificiality here, in that as I have also found, had BPE made further inquiries at the account opening stage, the probabilities are that no account would have been opened by UFSC, so that the collection issue would not have arisen. If, however, it is assumed that BPE was negligent at the account opening stage but nonetheless UFSC had proceeded to open an account with it, then, by now, the alarm bells should have been ringing unmistakably. If BPE should have been put on inquiry when asked to open the account, then the additional and striking facts relating to the cheque (the currency, the drawee bank, the payee, the absence of any mention of UFSC and the endorsement in blank) ought on any view to have prompted further inquiry. On this hypothesis, contrary to Mr. Ortigosa’s evidence, both the customer and the cheque would have been highly suspicious. It must, after all, be exceptionally unlikely, that a purchase of South African textile and property interests would be paid for by such a cheque.

If, conversely, the assumption is made (contrary to my conclusion) that BPE was not negligent in opening an account for UFSC at Mr. Giammello’s request, then the matter is altogether more difficult. The hypothesis here is that a customer, not suspected of any wrongdoing, has opened an account and, almost instantaneously, presented a cheque for collection, giving an explanation for the cheque consistent with that plausibly given but a short while previously when asking to open the account. Even so, in my judgment, the curiosities (already discussed) relating to the cheque ought to have given rise to misgivings. But I think it would be imposing an unrealistic standard to say that the failure of BPE to make further inquiries, consequent on such misgivings alone (i.e., not having been put on inquiry in relation to the opening of the account), amounted to negligence. It follows that if BPE was not negligent at the account opening stage, then its conduct in connection with the collection of the cheque does not disclose an independent ground of negligence.

(C) Withdrawal of the proceeds: The essence of BPE’s case here was that hindsight must be excluded; as expressed by Mr. Ortigosa in his witness statement:

HSBC’s case in this regard was straightforward. As a matter of fact, BPE knew of the withdrawals before they took place; in any event, BPE knew of the 26^th May withdrawals before the 4^th June withdrawal took place. BPE ought to have been put on inquiry, by reason of the rapidity of the withdrawals, the fact that their destinations belied the account thus far given by Mr. Giammello of the intended purpose of the UFSC account and the nature of at least certain of the major withdrawals. While ordinarily, a bank was under a duty to execute its customer’s order as to the payment out of funds standing to the customer’s credit in his account, the duty did not extend to the case where there was good ground for thinking that the customer was not entitled to the moneys at all; sometimes banks have to make difficult decisions in this context; the present was not such a case – it was clearly on the wrong side of the line. As to the money laundering regulations (if applicable), BPE’s duty was to abstain from effecting the withdrawals until it had reported its concerns to the Bank of Spain. BPE made no inquiries and made no such report. Its conduct was indefensible. BPE was negligent in this regard and such negligence was a cause of Linklaters’ loss.

In my judgment, HSBC’s case as to the withdrawal of the proceeds of the cheque is clearly established. BPE was negligent. Its negligence was a cause of Linklaters’ loss. If BPE was negligent at the prior account opening and cheque collection stages, then it was plainly negligent here. But even if BPE was not negligent at those earlier stages, its conduct with regard to the withdrawal of the proceeds was such as to disclose an independent ground of negligence. I turn to my reasons.

The facts: I start with the facts as to the withdrawals. Comment has already been made as to their rapidity, reducing the balance in the UFSC (£ sterling) account to £399,000 within one day of receipt of the proceeds of the cheque and to £48,000 odd by the 4^th June, 1999, nine days thereafter. As to the nature of the principal withdrawals and the destination of the funds in question, they were as follows:

£55,000 to a Panamanian investment company;

£45,000, withdrawn by Mr. Giammello in US$ travellers’ cheques (amounting to some US$67,500);

£295,000 paid to a company controlled by Mr. Martin (who had introduced Mr. Giammello to BPE);

£125,000 paid to an individual in South Africa;

£350,000 to a trust company in Malta.

Plainly BPE knew or must be taken to have known of the 26^th May withdrawals before the largest single withdrawal on the 4^th June. BPE’s knowledge, however, goes further. Mr. Ortigosa’s evidence was that he spoke to both Mr. Martin and Mr. Giammello at the branch, on the 26^th May, when Mr. Giammello came in to sign the many orders involved in the withdrawals made on that day. It follows that BPE did not learn about the 26^th May withdrawals only after the event.

BPE’s position: I turn to a consideration of reasonable and prudent Spanish banking practice. Putting the money laundering regulations to one side for the moment, nothing in the Spanish banking experts’ evidence recorded so far, suggests that the Spanish and English frameworks differ. Even though Prof. Curto said that a bank could not refuse to execute a customer’s order with regard to the transfer of funds from an account in credit without a court order, I did not understand Prof. Curto to go so far as to say that such was the case even when the bank had good reason to suspect that the customer was not entitled to the funds at all (for instance, because they were stolen). If he did, I would not have accepted such evidence, at least without very clear evidence of practice or Spanish jurisprudence in its support. Accordingly, there is no unfairness towards BPE in analysing its position in terms of the framework provided by English law.

As a matter of English law, BPE had to balance: (1) its duty to exercise reasonable care in and about executing its customer’s order to transfer funds, such duty extending to the true owner of the cheque; (2) its duty, when a customer is in credit, to execute, promptly, valid and proper orders as to the transfer of funds. In this regard, albeit from a somewhat different factual context, valuable guidance is furnished by the observations of Steyn,J. (as he then was) in Barclays Bank v Quincecare [1992] 4 All ER 363, at p.376:

Should BPE have been put on inquiry ? No hindsight is needed to answer this question, “yes”. These withdrawals are and must have been at the time, remarkable. Even if Mr. Ortigosa had not appreciated that there was a problem before the 26^th May, on that day the warning bells should have rung and all the more so by the 4^th June.

First, there was the rapidity of the withdrawals. Mr. Giammello had just opened the UFSC account(s) with BPE. The very next day after receiving the proceeds of a cheque for £989,000, he was removing nearly £600,000 from the account.

Secondly, there was the inconsistency with the account given previously by Mr. Giammello, as to the intended use of the funds. It will be recollected that discussion had centred on their investment in a Las Palmas property or construction project. Even a cursory glance at the intended destinations for the the 26^th May withdrawals must have revealed that they bore no resemblance to that which Mr. Ortigosa had been told hitherto.

Thirdly, there was the nature of the withdrawals.

The amount withdrawn in travellers’ cheques is striking. As I understood Mr. Ortigosa’s evidence, the highest denomination travellers’ cheque was US$1,000; even if all the travellers’ cheques were taken in that denomination, Mr. Giammello would have spent a considerable time at the bank signing those cheques. Mr. Ortigosa was reluctant to accept that the withdrawal of £45,000 ($67,500) in travellers’ cheques was very unusual; he said that the branch was the first or second most important branch within the BPE group in terms of the volume of operations with foreign clients and some clients had been known to withdraw more than US$100,000 in travellers’ cheques in a single day. Mr. Ortigosa’s defensiveness here did him no credit and lacked credibility; even taking his evidence on this topic at face value, this withdrawal was, to say the least, very unusual.

Next, there is the anonymity of the Panamanian and Maltese destinations and the fact that both are tax havens.

Finally here, there is the payment to Mr. Martin’s company. Mr. Ortigosa was apparently told by both Messrs. Giammello and Martin that this payment was in respect of a sale of frozen fish by Mr. Martin to Mr. Giammello. There had been no prior mention of any such transactions between Mr. Martin and Mr. Giammello, or their corporate vehicles. The explanation given is incredible; in cross-examination, Mr. Ortigosa said, in effect, that his obligation was to believe what he was told by Mr. Martin and his customer. That stance is most unsatisfactory. I cannot escape the conclusion that, either, in his evidence, Mr. Ortigosa was seeking to avoid giving a direct answer as to whether he believed the explanation given or, in this regard, on the 26^th May, 1999, Mr. Ortigosa had shut his eyes to an unpalatable fact.

Causation: As it seems to me, Mr. Blair was right to submit that this was not a case where BPE faced a difficult decision; on the facts of the withdrawals of the 26^th May alone, a fortiori when the 4^th June withdrawal is included in the picture, as Mr. Blair put it, “.. wherever the boundary lies, it was well and truly crossed.” As a matter of reasonable and prudent Spanish banking practice, BPE should not have permitted the withdrawals of 26^th May and/or 4^th June to proceed without further inquiry. As already appears, this was not a case where BPE only learnt of the withdrawals after they had taken place. On the 26^th May, Mr. Ortigosa could and should have declined to permit the withdrawals without further inquiry. In the, perhaps inherently unlikely, event that Mr. Giammello had lingered to dispute this decision, Mr. Ortigosa could have consulted his superiors and BPE could have sought an order from the Spanish Court. There is nothing to suggest that such an order (if need be) could not have been obtained or would have been ineffective. Pausing here, plainly a bank would not adopt such a stance lightly; I am, however, driven to this conclusion in that nothing less would meet the facts surrounding these withdrawals. Had the 26^th May withdrawals been stopped in their tracks, there would have been no Linklaters’ loss. BPE’s negligence in this regard was obviously causative of that loss.

As to the 4^th June withdrawal, suffice to say it beggars belief that this transaction was permitted to proceed. Even had BPE only acted to prevent the 4^th June withdrawal, the loss would have been reduced by some £400,000. Accordingly, if wrong in my conclusion that the 26^th May withdrawals should not have been permitted without further inquiry, then BPE’s negligence with regard to the 4^th June withdrawal was itself causative of loss in an amount of about £400,000.

The money laundering regulations: In the light of the parties’ submissions, it is necessary to deal briefly with the money laundering regulations. Before turning to the detail, it may be convenient to record my conclusions: (1) If these regulations were applicable, then BPE was in breach of a reporting duty thereunder. (2) As a matter of causation, any such breach of duty on the part of BPE does not add anything to the conclusion already reached, namely, that BPE should not have permitted the withdrawals to proceed without further inquiry. (3) Conversely, there is no basis for saying that to avoid the danger of “tipping off”, BPE should have permitted the withdrawals to proceed without more ado or would have been directed or advised by the Bank of Spain to do so. Accordingly, the money laundering regulations are, on any view, academic; if applicable, they neither add to nor undermine the conclusion as to BPE’s causative negligence in permitting the withdrawals to proceed; if inapplicable, no more need be said of them. In the circumstances, it suffices to proceed on the working assumption that these regulations were applicable without the need to express any final view as to their true scope.

Insofar as here material, the money laundering regulations provide as follows:

Plainly not all fraud involves money laundering, at least within Art. 1 of these regulations. However, given the suspicious nature of the 26^th May and 4^th June withdrawals and the context of money laundering regulations, I am prepared to proceed on the assumption that the wording which I have emphasised in Arts. 5(1) and 7(1) is of sufficient width to render these regulations applicable.

I regard the wording of Art. 9(1) as clear: a bank is not to proceed with a transaction falling within Art. 7(1), without first reporting it to the Bank of Spain. Prof. Curto’s evidence was, I fear, not easy to follow in this regard. While “tipping off” is obviously, in general, a risk to be taken seriously in the present context, the regulations in terms impose a prohibition on effecting the questionable transaction until the reporting duty has first been complied with. It is true that Art. 9(1) does not prohibit the bank from carrying out the transaction once the reporting duty has been complied with but this consideration in no way weakens the importance of the duty to report. If, which I doubt, Prof. Curto’s evidence suggested otherwise, then, very respectfully, I would feel unable to accept such evidence. At all events, BPE made no report and was accordingly in breach of its duty under Art. 9(1), provided only that the money laundering regulations were applicable.

I turn next to the argument that any failure by BPE to comply with its reporting duty was not causative. In cross-examination, Prof. Curto suggested that there was no point in reporting the transaction to the Bank of Spain:

Always on the assumption that the money laundering regulations were applicable, there remains the question of whether concern as to the danger of “tipping off” should have led BPE to permit the withdrawals to proceed or would have resulted in a direction or advice from the Bank of Spain to BPE to such effect. Suffice to say that in the present case, there is no foundation for any such conclusion. It follows that a consideration of the money laundering regulations does not undermine the conclusion to which I have come as to the causative effect of BPE’s negligence in failing to make further inquiry as to the proposed withdrawals.

(3) The legal framework: On the hypothesis that the Contribution Issues arise, namely that HSBC fails in its claim for an indemnity or damages for breach of warranty, then it was common ground that the parties’ contribution claims inter se, fall to be dealt with in accordance with the 1978 Act. That Act provides, insofar as material, as follows:

Although neither HSBC nor BPE have been found liable to Linklaters, they are entitled to claim contribution pursuant to s.1(4) of the 1978 Act. The contribution to be assessed must be “just and equitable having regard to the extent of that person’s responsibility for the damage”; “responsibility” includes both blameworthiness and causative potency; the assessment is qualitative rather than quantitative (in terms of the number of faults). The object of such contribution proceedings is to ensure that each party responsible for the damage makes an appropriate contribution to the cost of compensating the party who has suffered damage, regardless of where the cost has fallen in the first instance. See, generally, Lord Nicholls in Dubai Aluminium v Salaam [2002] UKHL 48 [2002] 3 WLR 1913, at [51] – [52]. I turn to apportionment.

(4) Apportionment: In the light of my earlier conclusions that both HSBC and BPE were guilty of causative negligence, there can be no question of either bank being entitled to a complete indemnity under s.2(2) of the 1978 Act. “But for” the negligence of each bank, Linklaters would not have sustained loss.

With regard to apportionment, each case must of course be decided on its own facts; no useful purpose would accordingly be served by a trawl through Middle Temple in a search for detailed points of similarity or contrast, in order to arrive at the apportionment in this case.

To my mind, BPE was seriously at fault in failing to know its customer. It was, according to the evidence of banking practice recorded in Middle Temple, BPE’s duty as collecting bank to ensure that it was collecting for the right customer and true owner. BPE’s conduct in this regard was notable indeed for the unfavourable contrast between Mr. Ortigosa’s compliance with form and neglect of substance. Further, BPE’s fault was not confined to a single instance; as I have held, it was at fault in opening the account, in collecting the cheque and, additionally or independently, in permitting the withdrawals to proceed. To my mind, BPE must bear the majority of the responsibility for Linklaters’ loss.

Turning to HSBC, it is true that Mr. Cooney’s involvement with the cheque was brief and his and HSBC’s fault lies in a one-off failure to investigate further. That said, the fault was significant. It involved an elementary failure to follow HSBC’s own procedures, in connection with an English cheque. Had those procedures been followed, a simple inquiry of Zeneca would in all probability have averted the loss.

In all the circumstances and having regard to both blameworthiness and causative potency, had HSBC not succeeded on the Indemnity/Warranty Issues, I would have assessed contributions from the two banks as between themselves on the basis that BPE’s responsibility for the damage in question was 2/3 and HSBC’s was 1/3. In the event, however, by reason of my decision on the Indemnity/Warranty Issues, HSBC is entitled to a complete indemnity from BPE.

I shall be grateful for assistance from counsel as to the form of the order and as to all questions of costs.