Swotbooks.com Ltd v Royal Bank of Scotland Plc

On 28 May 2009 the Defendant, the Royal Bank of Scotland plc (“the Bank”), made a payment of £231,021.49 to Libri GmbH (“Libri”), purporting to do so pursuant to a Standby Letter of Credit which the Bank had issued to Libri on 31 July 2006 at the request of its customer, the Claimant, and notwithstanding protestations from solicitors acting for the Claimant that the documents which Libri had presented to the Bank earlier that month did not conform to the requirements of the Credit. The Bank proceeded to debit Swotbook’s security account with the sum paid to Libri, together with a charge of £60.

The documents required by the Credit included (i) a “certified true and correct copy invoice evidencing the value of the goods delivered” and (ii) a “certified true and correct copy transport document”. The Credit expressly incorporated the Uniform Customs and Practice for Documentary Credit (1993) Revision ICC Publication 500 (“UCP 500”) and had an expiry date of 31 May 2009.

In these proceedings the Claimant, now in liquidation, maintains its contention that the Bank paid against discrepant documents (its case being that Libri presented neither a compliant invoice nor a compliant transport document), and accordingly claims that the Bank was not authorised to pay Libri and was therefore not entitled to debit the Claimant’s account.

The Bank’s defence is that the documents presented by Libri did comply with the terms of the credit so that the payment it made was fully authorised. But, if the documents were discrepant, the Bank contends that the Claimant subsequently ratified the Bank’s payment to Libri by virtue of the way its debt to Libri was treated in accounting entries in the Statement of Affairs prepared by the Claimant’s outgoing director on 24 July 2009 and submitted to Companies House by the Claimant’s newly appointed liquidator on 27 July 2009. In the further alternative, the Bank contends that the Claimant should not be allowed to recover from the Bank as that would unjustly enrich the Claimant at the expense of the Bank.

Until it went into creditors’ voluntary liquidation on 27 July 2009, the Claimant was an internet book retailer, trading under the name ReadMore and selling books to customers in the UK and Ireland. The Claimant’s customers placed orders online, providing credit card or other payment details. The Claimant would then place corresponding orders with a wholesaler of books, usually Libri, a wholesaler based in Hamburg, Germany. Libri would fulfil those orders by despatching books directly to the Claimant’s customers by courier. Once an order had been despatched, the Claimant would take payment from its customer and Libri would invoice the Claimant.

The sale agreement between the Claimant and Libri required the Claimant to provide Libri with security for sums due to Libri in the form of a bank guarantee. On 28 July 2006 the Claimant applied to the Bank for a standby letter of credit to be issued in favour of Libri in the sum of £250,000, agreeing to indemnify the Bank in respect of its commitment to Libri.

The application form also contained the following provisions:

“10.2

Authority to pay

10.2.1

The [Claimant] irrevocably and unconditionally directs the Bank to make such payments and comply with such demands as may be claimed from or made on the bank in respect of or purporting to be in respect of the Bank’s Commitment as the Bank thinks fit without any reference to the [Claimant] or any necessity to obtain the [Claimant’s] confirmation or verification and notwithstanding that the [Claimant] may have disputed the Bank’s liability to make such payments or to comply with such demands or that the Bank’s Commitment may not be legally binding on the Bank.

10.2.2

The [Claimant] agrees that any such payment or compliance by the Bank shall as between the bank and the [Claimant] be conclusive evidence that the Bank was liable to make such payment or comply with such demand.”

The Bank accepted the application and, on 31 July 2006, upon the Claimant paying £250,000 into a security account in respect of the indemnity, duly issued an irrevocable standby letter of credit to Libri in the following terms:

In its Defence the Bank relied upon the “authority to pay” provisions set out in paragraph 7 above to plead that it was entitled to be indemnified by the Claimant against its payment to Libri even if the documents presented by Libri did not comply with the requirements of the Credit. Reliance on those provisions was abandoned shortly before trial, although in my judgment they continue to have some relevance to the Bank’s defence based on “unjust enrichment” as explained below.

It is common ground that between about December 2007 and February 2008 Libri supplied thousands of books to customers of the Claimant (for which the Claimant was paid by those customers), and that the Claimant was indebted to Libri in a sum at least equivalent to that eventually paid to Libri by the Bank. Mr Wilson, Counsel for the Claimant, referred to the fact that the Claimant may have some cross-claims against Libri, but confirmed in his opening submissions that they were not relied upon in these proceedings.

Libri made unsuccessful presentations under the Credit on 5 May 2008 (revised or supplemented on 30 May 2008) and on 22 September 2008 (again revised or supplemented on 12 November 2008), in each case the invoice total amounting to €395,622.21, a sum in excess of the limit of the Credit. Among the reasons given by the Bank for rejecting the documents presented were (a) that the copy invoices did not specify that they related to the provision of books and in some instances included other items such as calendars or CDs and (b) that a “declaration in lieu of oath” by Libri dated 21 April 2008, declaring that it had handed over the orders from the Claimant to Deutsche Bundespost (and attaching a list of items described as “German Post Transfer Document”) did not sufficiently evidence delivery to the Claimant. However, by letter dated 20 November 2008 the Bank informed Libri’s UK solicitors that it considered that confirmation from DHL (a subsidiary of Deutsche Bundespost), if attached to the declaration and listing provided by Libri, would satisfy the requirement of a copy transport document.

On 9 April 2008 Libri asked the Bank to return all documents previously presented, which the Bank duly did. It is common ground between the parties that Libri was entitled to make fresh presentations thereafter and that the Bank was both obliged and entitled to consider those new presentations on their face, uninfluenced by any knowledge of what may have been previously presented.

On 6 May 2009, Libri made a fresh claim for a partial drawing under the Creditfor €261,454.83 and presented:

On 11 May 2009 the Bank rejected the claim on the grounds that (a) it was for an amount in Euros, whereas the Credit was denominated in sterling; (b) the invoice showed items other than books (e.g. CDs and DVDs) in some of its entries; and (c) there was a discrepancy between the number of items listed in the invoice (10,927) and the number in the transport document (11,748).

On 19 May 2009, with the expiry date of the Credit fast approaching, Libri’s German lawyers sent a detailed letter and substantial further enclosures, received by the Bank on 21 May 2009. Libri’s lawyers did not ask for any of its previously submitted documents to be returned, stating that “We refer fully to our client’s claim of 6 May 2009”, and did not enclose a completely fresh set of documents, but asked the Bank to replace the previously submitted version of documents B-D with new versions as follows:

On 22 May 2009, the Bank accepted the presentation in this revised form and confirmed to Libri’s lawyers that it would be making payment. The Claimant’s lawyers protested by letter dated 26 May 2009, but the Bank nevertheless made payment to Libri on 28 May 2009, having deducted the sum of £231,081.49 from the Claimant’s Security Account on the previous day.

Mr Wilson first addressed the purported transport document, considering it, rightly in my judgment, to be the most obviously discrepant of the documents presented to the Bank on 19 May 2009.

Although the Credit did not specify the type of transport document required and although UCP 500 does not contain a generic description of “transport document”, the nature and type of document required is well established. According to Jack: Documentary Credits 4^th ed (2009) at 8.82:

“A transport document is issued by the carrier when the goods are consigned. In the documentary credit transaction it performs three main functions:

(1)

It evidences receipt of the goods in the charge of the carrier for delivery as specified in the document. This gives the bank and the buyer the assurance when paying against the document that the goods have been despatched.

(2)

In the case of negotiable marine bill of lading (and, possibly, certain other transport documents), it acts as what can loosely be described as a document of title giving rights of ownership or possession to the holder. ..

(3)

It evidences the existence and terms of the contract of carriage between the consignor and the carrier. ...”

UCP 500, in Articles 23 to 30, make specific provision for well-known types of transport document, such as bills of lading and air transport documents, each of which will be issued by the carrier when the goods are consigned and evidences that the goods in question have been despatched. Article 29 makes specific provisions for documents issued by a courier and the ICC Guide to Documentary Credit Operations contains (at p.85) a specimen DHL courier service document. There can be no doubt, in my judgment, that the reference to transport document in the Credit is a reference to these type of documents and that the Bank should have required such a document or documents under the Credit. It is noteworthy that the Bank’s standard form application for a Credit, used by the Claimant in this case, refers to “Certified true and correct copy transport document, evidencing shipment of the goods .... (e.g. Bills of Lading, AWB, CMR)”.

In my judgment the document submitted by Libri in this case and accepted by the Bank is clearly not such a transport document. Whilst the first page is issued and stamped by a well-known courier, DHL, it amounts to no more than confirmation, in May 2009, that 10,641 packages had been passed by Libri to DHL, that those packages were despatched by DHL and that there were no complaints concerning those consignments. DHL does not provide any details as to the date or place of consignment nor as to the consignee. All further details are said to be “according to Libri”, as set out in the attached “packing list from 3^rd December 2007 to 22^nd February 2008”. It is also only “according to Libri” that the deliveries were “accomplished on behalf of Swotbooks.com Limited to their end customers”.

It follows that the DHL document was far from contemporaneous and did not provide evidence from DHL of the consignment of any goods to the order of the Claimant at any time. It was also quite clearly not a courier service document of the type which would be expected under the ICC Guide to Documentary Credit Operations. Yet on the face of it, there should have been such documents: the invoice submitted by Libri identified both “Transport Document No.” and “Delivery Note No.” against each item listed, yet the Bank did not require presentation of either of those categories of documents, notwithstanding that they would appear to be far closer to what was demanded in the Credit.

Mr Taylor, Counsel for the Bank, defended the Bank’s decision to accept the DHL letter as a valid transport document on a number of grounds. First, he pointed out that no particular type of transport document was specified in the Credit and that Bank officials with considerable experience in dealing with such presentations, such as Mr David Silverwood, who has spent 40 years in trade and payment services with the Bank or NatWest, were satisfied that this was a compliant document. However, whilst I pay due regard to the fact that the decision to accept the documents was taken by undoubtedly very experienced officers of the Bank, they were not called to give evidence as experts and, of course, it is their decision to pay against the documents which is in issue. It would be wrong to be too heavily influenced by their evidence that the decision they themselves took was correct. But in any event, Mr Silverwood gave evidence (a) that he had never seen a transport document like this one before, although he stressed that that did not stop it from being a transport document; and (b) that he only saw some sample pages, sent to him by fax. In my judgment, the fact that an experienced banker such as Mr Silverwood had not come across a “transport document” of this type reinforces my conclusion that it was not a compliant document.

Mr Taylor also relied on the fact that the “Packing List”, which set out details of the consignments, was bound together with the DHL letter, so that the Bank was entitled to regard it was one document, all emanating from DHL. Ms Nichols’ evidence was that that was how she regarded the document when she considered it. Mr Taylor emphasised that it was not open to the Claimant to rely on the fact that it would have been apparent from earlier presentations that the list emanated from Libri. However, in my judgment the nature of the document and the extent to which DHL was (or was not) providing confirmation and evidence was plain from the DHL letter itself. Binding the packing list to DHL’s letter does not change the nature or extent of DHL’s confirmation.

Mr Taylor further argued that it would have been uncommercial for the Bank to have demanded presentation of thousands of individual delivery documents for the books in question, particularly when it became clear from the evidence of Mr Ramon Gray, the Claimant’s former director, that DHL delivery documents were transmitted electronically. Whilst that may well be true, all that it demonstrates is that the terms of the Credit may not have been suitable for Libri’s purposes given the nature of the trading relationship. It is part of the autonomy principle which governs letters of credit that the Bank cannot take account of the underlying trading relationship between the parties. As is made clear by Articles 13a and 14b of UCP 500, the Bank must adhere to the strict terms of the credit and cannot take into account any extraneous information or documents, points which the Bank itself made to Libri’s advisers on several occasions. As ViscountSumner said in Equitable Trust Co of New York v. Dawson Partners Ltd (1926) 27 Ll L Rep 49 at 52:

“There is no room for documents which are almost the same, or which will do just as well… [The bank] cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, it acts at its own risk.”

Mr Taylor also relied upon the fact that the Credit referred to “transport document” (rather than “transport documents” in the plural) as indicating that multiple documents were not expected and that a summary was permissible. However, in my judgment the plain meaning of the Credit is that Libri should supply a transport document for each consignment for which it was claiming. It was clear that multiple consignments might be claimed for, not least because partial drawings were permitted. I see nothing in the use of the term “transport document” which would justify the view that Libri could submit a summary document rather than copies of the originals issued by the carrier.

I therefore hold that the DHL letter (and attached packing list) presented by Libri to the bank did not comply with the requirements of the Credit.

Further, presenting a single document as the Transport Document was not consistent with the Invoice, which on its face referred to many different Transport Documents, each with its own number. Article 13 of the UCP confirms that “Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit”.

Article 37 of UCP 500 provides:

“Unless otherwise stipulated in the Credit, commercial invoices;

i, must appear on their face to be issued by the Beneficiary named in the Credit ....

ii.

must be made out in the name of the Applicant ...

iii.

need not be signed.

Mr Wilson argued that, as with a transport document, the requirement under the Credit in respect of an invoice was that it was issued contemporaneously, evidencing the transaction. This, he submits, is why the Credit requires a certified copy, the original being presumed to have been sent to the Claimant at the time of the sale. Mr Wilson contended that the invoice dated 15 April 2009 was discrepant because it was not a copy of an original trading invoice, but on its face a document which had been concocted solely for the purpose of presentation to the Bank, being described as a “partial summary invoice”.

In my judgment, however, there is no requirement, in UCP 500 or otherwise, as to when an invoice must have been issued and there is nothing to prevent a beneficiary revising, re-issuing and representing an invoice, even if it is for the primary purpose of satisfying the terms of a letter of credit and even if it is in a different form from earlier versions. Whilst I agree that the Invoice presented by Libri was an unusual document, it appears to meet all the requirements of a commercial invoice on its face.

The Claimant also contends that, having rejected the invoice submitted on 6 May 2009 as discrepant because it referred to items other than books, the Bank could not accept the revised invoice submitted on 19 May 2009. Mr Wilson relied upon the fact that the Bank did not return the 6 May documents and that the presentation of 19 May “fully referred to” the 6 May presentation. He contended, without alleging fraud or other misconduct on the Bank, that it was apparent on the face of the documents before the Bank that the revised invoice contained the same items as had previously been regarded as discrepant, but simply changed the way they were described.

However, in the course of their evidence the Bank’s witnesses expressed the view that they had in any event been wrong to reject the invoice presented on 6 May because each item was described generically as a “book” and was therefore covered by the Credit. The fact that the detailed description made reference to the fact that certain books were accompanied by diskettes or CDs should not have caused them to find that the invoice was discrepant. I accept that view. But in any event, I also accept that the Bank was obliged and entitled to consider the documents presented on 19 May 2009 as it would any new presentation, considering the replacement documents on their face. It would not have been appropriate for the Bank to engage in a consideration of changes between versions of documents, let alone speculate on the reasons for those changes.

The Claimant’s final criticism of the Invoice was that all prices of items and the grand total remained denominated in Euros, and that all that Libri had done was to apply an exchange rate as at 15 April 2009 to arrive at the sterling total shown in the invoices. In this regard Mr Wilson referred to paragraph 64 of the guidance in the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP), which states: “An invoice must evidence the value of the goods shipped. Unit price(s), if any and currency shown in the invoice must agree with that shown in the credit”.

Mr Taylor pointed out that the Invoice did not show unit prices, but constituted a single invoice in sterling, the currency of the Credit. He further stressed that, as made clear in Article 15 of UCP 500, the Bank was unconcerned with the question of whether the amount invoiced accurately represented the value of the goods.

In my judgment, however, the purpose of requiring a copy of an invoice is to provide evidence of precisely what sum is due to the beneficiary. The reason why the invoice and its constituent elements are required to be in the currency of the Credit (and was previously rejected by the Bank in this case) is because there will otherwise be uncertainty as to the sum to be paid under the Credit, there being no basis on which to decide which exchange rate to apply and as at what date. A unilateral conversion by the beneficiary or the Bank could lead to too much being paid.

In the present case it is apparent from the explanation in the Invoice itself that the Claimant had previously been invoiced for the items supplied many months before, in Euros, and that Libri had simply applied an exchange rate from an unspecified source to the total of those sums as at 15 April 2009. The Bank had no basis for accepting that exchange rate or the date chosen for applying it. In my judgment the Bank was right to reject the previous invoice denominated in Euros and had no basis for taking a different stance in relation to the revised invoice which simply purported to convert the total invoiced amount into sterling.

I therefore hold that the Invoice submitted on 19 May 2009 should also have been rejected by the bank as discrepant.

In the course of opening arguments, I raised the question of whether it was evident on the face of the documents before the Bank (or otherwise the Bank was on notice) that Libri’s statement in document “A” dated 5 May 2009 (that the Claimant had not made payment within 14 days) could not be true in relation to the revised invoice which, although still dated 15 April 2009, was evidently not created, let alone sent to Libri, until after the Bank had rejected the version sent to the Bank on 6 May 2009. Mr Wilson thereafter applied to further amend the Particulars of Claim to rely on that point as a further discrepancy. Mr Taylor objected to the proposed amendment on the grounds of its lateness and that responding to it would require further factual enquiry by the Bank and possibly the adjournment of the trial. For those reasons I did not permit the amendment. It would have been unjust to permit the Claimant to argue that point on such short notice, particularly given that the Claimant’s solicitors advanced that very argument in their letter to the Bank of 26 May 2009 but the point was not thereafter pursued in these proceedings.

I therefore find that the documents presented to the Bank on 19 May 2009 were discrepant in a number of respects and that the Bank was not entitled to pay against them. It follows that both the Bank’s payment to Libri and the debit to the Claimant’s security account were unauthorised by the Claimant.

On 27 July 2009 Mr A. Clifton of Leonard Curtis was appointed as liquidator of the Claimant and the same day filed a Statement of Company’s Affairs pursuant to section 95 of the Insolvency Act 1986, incorporating an affidavit from the Claimant’s outgoing director, Mr Gray, which in turn exhibited an Estimated Statement of Affairs dated 24 July 2009 prepared pursuant to section 99 of the Insolvency Act 1986. The Estimated Statement of Affairs had been presented to the meeting of the Claimant’s creditors on 27 July 2009 and was also annexed to a letter sent by the Liquidator to all members and creditors of the Claimant on 28 July 2009.

The list of the Claimant’s creditors included an entry which showed that the Claimant’s indebtedness to Libri was £54,000, a figure which Mr Gray accepted “took into account” (by reducing the debt otherwise owed to Libri) the £231,021.49 which the Bank had paid to Libri on 28 May 2009. The £54,000 shown as being due to Libri was included in the trade and creditors item of £219,571.43 on the Claimant’s balance sheet, and contributed to the overall deficiency as regards non-preferential creditors of £898,662.85. That last figure was repeated in the Liquidator’s Statement of Receipts and Payments filed with the Registrar of Companies on 28 July 2010 and 7 February 2011.

The Bank contends that such accounting entries, authorised by a director and then by the liquidator of the Claimant, shows that the Claimant took the benefit of the Bank’s payment so as to reduce its debt to Libri, thereby adopting and ratifying the Bank’s payment. It was common ground that words or conduct will constitute ratification when they constitute clear or “unequivocal” evidence that the transaction is adopted (Bowstead and Reynolds on Agency 19^th ed, 2-070 and 2-073), that is to say, “when you cannot logically analyse the act without imputing ... approval” (Harrisons & Crossfield Ltd. London & N.-W Co. [1917] 2 KB 755 per Rowlatt J. 758), it being immaterial whether the act of ratification was communicated to the Bank. Mr Taylor emphasised that both Mr Gray, in verifying the Estimated Statement of Affairs, and the liquidator in subsequent filings, were subject to statutory obligations to record particulars of the Claimant’s debts and liabilities.

If those accounting entries constituted the entirety of what the Claimant said about the Bank’s payment to Libri in the Estimated Statement of Affairs documents, such entries would in my judgment have amounted to an adoption and ratification of those payments. This is not a case, such as London Intercontinental Trust Ltd. v. Barclays Bank Ltd. [1980] 1 Lloyd’s Rep 241 or Limpgrange Ltd. v. BBCI [1986] FLR 36, where the effect of unauthorised transfers to agents of the claimant company was to give the claimant a choice whether to claim the amount of the transfer from its bankers or from its agent. In such cases, merely recording the agent as a debtor cannot not amount to an unequivocal election between the two claims so as to ratify the otherwise unauthorised payment by the bankers. As Staughton J. explained in Limpgrange (page 55):

“Given that the company had such a choice, and that even the commencement of proceedings against one or the other of them would not necessarily be an exercise of it, the mere recording of [the agent] as a debtor in the company’s books was not in my judgment an exercise of the choice in this case. It was an act which could logically be analysed without imputing approval. The company may have dipped its toe in the Rubicon but had not crossed it.”

In the present case, in contrast, the unauthorised payment by the Bank did not give rise to an alternative claim by the Claimant against Libri. It follows that recording the payment as reducing Swotbook’s debt to Libri cannot be explained as recording one of two possible claims which Swotbook’s retains the right to choose between. If the accounting entries were all that was said about the Bank’s payment, they could only be explained on the basis that the Claimant had adopted the Bank’s payment. In Limpgrange, (page 54)Staughton J. explained the distinction as follows:

“If in law the effect of unauthorised transfers was that [the bank] owed the company money and [the recipient] did not, I should hold that this did amount to ratification: it could not logically be analysed without concluding that the transfers were approved, that [the recipient] owed the company money, and that [the bank] did not. But in my judgment the premise of this argument is not well founded. The case is one of election ...”

However, the accounting entries (and the inferences to be drawn from them) cannot be considered in isolation because the Estimated Statement of Affairs also expressly addressed the Bank’s payment to Libri. The balance sheet (the very same document relied upon by the Bank for its contention that its payment to Libri of £231,021.49 was ratified) recorded that the Claimant had an asset of £231,000, described as “claim against bank”. The notes on the next page provided the following explanation: “The claim against the bank relates to a payment made by the bank of 263,242.34 (£231,021.49) paid to Libri GmbH in respect of a letter of credit from funds of £250,000 held in a deposit account. The directors refused the bank permission to make the payment because the invoices had not been approved”. Further, each of the liquidator’s subsequent filings recorded that the Claimant had the following asset: “Recovery of Bond approx ...... 231,000”.

In my judgment, considering the effect of the Estimated Statement of Affairs as a whole, it is not possible to conclude that Swotbook’s ratified the Bank’s payment in circumstances where it expressly recorded that the payment was unauthorised and that the Claimant maintained a claim against the Bank in that regard. The most that can be said is that there is an inconsistency between the express references to the Bank’s payment being unauthorised and subject to a claim on the one hand and the apparent accounting treatment of that payment on the other. It is not necessary to determine which of those inconsistent approaches prevails (although the obvious answer would be that the express references to the status of the payment would override alleged inferences drawn from accounting entries) because it cannot be said that Swotbook’s words or conduct unequivocally demonstrated that it adopted the transaction. Further, given that the Claimant was expressly maintaining its claim against the Bank, a logical explanation of the accounting entries would include that they were calculated on a mistaken basis, such as being an assessment of what Libri would be likely to claim (rather than their strict contractual entitlement), the latter being Mr Gray’s explanation when cross-examined by Mr Taylor.

The Bank’s reliance on the subsequent filings by the liquidator is based on the fact that he repeated the figures in the Estimated Statement of Affairs, to which reference would have to be made to ascertain that those figures recorded the Libri debt as £54,000. It follows that those document do not advance the Bank’s case on ratification any further, particularly as they each expressly refer to the claim against the Bank as an asset of the Claimant.

I therefore find that the Claimant did not ratify the Bank’s payment.

It is common ground that the Claimant received payment in full for the books it sold to its customers as soon as they were despatched to those customers by Libri. The Bank contends that, in those circumstances, to permit the Claimant to recover from the Bank would amount to the Claimant being unjustly enriched in the amount recovered, effectively being paid twice for the books supplied by Libri. The Bank argues that “the fair and principled resolution of the case” does not permit the Claimant to recover from the Bank.

In my judgment the reasoning underlying the Bank’s contention is flawed. Whilst the Claimant had indeed received payment from its customers, it was also indebted to Libri in a corresponding (if lesser) sum. It had also placed £250,000 on deposit with the Bank, from which (as I have found) the Bank withdrew £231,021.49 without authority. Recovering its own money from the Bank does not in any sense “enrich” the Claimant (let alone amount to being “paid twice”) unless the Bank had in the meantime made a payment for the Claimant’s benefit, so that recovering from the Bank would amount to a double benefit. But as the Bank’s payment to Libri was without the Claimant’s authority, it did not discharge the Claimant’s debt to Libri and the Claimant did not receive any legal benefit from the payment. Libri would have been entitled to pursue the Claimant for the full amount of the debt and remains entitled to prove that debt in the Claimant’s liquidation (and perhaps would have done so had the Bank sought to recover its payment to Libri on the basis that it was a payment by mistake).

The question of whether an unauthorised payment to a customer’s judgment creditor would give rise to an equity in favour of the paying bank was addressed by the Court of Appeal in Crantrave Ltd. v. Lloyds Bank plc [2000] QB 917. Pill L.J., after considering B. Liggett (Liverpool) Ltd. v. Barclays Bank Ltd [1928] 1 KB 48 and In re Cleadon Trust Ltd. (1939) Ch 286, stated as follows at 923 F:

“Applying the Cleadon case to the present facts, I regard it as authority for the proposition that, in the absence of authorisation or ratification by the company of the bank’s payment to the third party, the “mere fact” that the bank’s payment enured to the benefit of the company does not establish an equity in favour of the bank against the company. Moreover, even upon Wright J.’s formulation in the Liggett case, in order to establish the equity, the bank would have to show that the payment discharged (at least partially) a legal liability of the customer. In the absence of evidence that the bank’s payment has been made on the customer’s behalf or subsequently ratified by him, the payment to the creditor will not of itself discharge the company’s liability to the creditor .... It is not established in this case that the company’s legal liability to the company’s creditor had been discharged by the voluntary payment by the bank. While stating that the rule appears to be of “little merit” Goff and Jones by reference to authority state that ... “it is not easy to discharge another’s debt in English law. This will occur only if the debtor authorised, or subsequently ratified the payment”. Thus the two principles coincide and authorisation or ratification is necessary.”

However, Pill L.J. recognised at p. 924E that there may be situations going beyond the “mere fact” that the bank’s payment enured to the benefit of the customer where relief may be granted to the paying bank:

“There will be circumstances in which a court may intervene to prevent unjust enrichment either by the customer having his money from the bank as well as having the claim of his creditor met, or by the creditor who has double payment of the debt. The onus is in my judgment on the bank to establish the unjust enrichment on the evidence. In this case not only is there no evidence of authorisation or ratification of the payment to the third party by the customer but there is no evidence of unjust enrichment of the customer. In the absence of authorisation or ratification of the payment, the bank must in my judgment meet this claim and recoup the sum paid, if they can, from the third party to which it was paid.”

May L.J. also recognised that authority or ratification might not always be necessary, stating as follows at p. 925F:

“In another case, it might be possible to establish that the customer ratified the gratuitous payment either expressly or by taking advantage of it; or there might conceivably be circumstances not amounting to ratification in which it would nevertheless be unconscionable to allow the customer to recover from the bank the balance of the his account without deduction of a payment which the bank had made gratuitously. But I agree with Pill L.J. that no such circumstances were established in the present case”

Mr Taylor, on behalf of the Bank, argued that this was a case in which it would be unconscionable to allow the customer, the Claimant, to recover. However, in my judgment the Bank has not been able to point to any aspect of this case which goes beyond the “mere fact” that the Bank’s payment enured to the benefit of the Claimant, albeit without discharging the Claimant’s debt to Libri. Mr Taylor relied on the fact that the Bank’s payment to Libri was necessarily mistaken, mistake being an “unjust factor” in the law of restitution. However, in most cases where a bank pays without authority it will have done so under some operative mistake. Such mistake may well be a potential ground on which it is entitled to recover from the payee: but the fact that a bank wrongfully debited its customers’ account by mistake and thereby paid a creditor of its customer without authority, does not of itself, in my judgment, make it unconscionable for the customer to recover the mistaken payment from the bank.

The Bank faces a further difficulty in establishing that the Claimant should be denied recovery on the grounds of unjust enrichment. In determining whether recovery would be unjust, the starting point must be the contract between the parties and the manner in which benefits and burdens have been allocated between them by agreement. In this case the terms on which the Bank issued the Credit included provisions which expressly authorised the Bank to pay any demand made by Libri under or purportedly under the Credit and provided that payment by the Bank was conclusive evidence of its liability to make such payment (see paragraph 7 above). The Bank pleaded reliance on such provisions in its Defence but, faced with contentions in the Reply that those provisions did not meet the requirement of reasonableness under section 3 of the Unfair Contract Terms Act 1977, elected not to rely on them at trial. However, the Bank did not concede that the provisions were unreasonable or unenforceable, and I have not heard any evidence or argument on that issue. The resulting position is that there are provisions in the contract between the parties which would, on their face, prevent the Claimant recovering from the Bank in this very situation, but the Bank has simply elected not to rely on those provisions. In my judgment the Bank cannot elect not to rely on contract terms and then simply assert that recovery by the Claimant which would be prohibited by those terms would be unjust. The burden is on the Bank to establish that recovery would be unjust in all the circumstances, in particular in the context of the contractual framework, a burden which the Bank cannot start to discharge without addressing the contractual provisions and their effect.

I should add that the Bank’s recognition that its payment to Libri was by mistake demonstrates that it could have protected its position by joining Libri in these proceedings, and could still mount a claim against Libri. In my judgment, as in the Crantrave case, the Bank must meet its customer’s claim and recoup the sum paid, if they can, from Libri.

The Claimant is therefore entitled to a declaration that the Bank was not entitled to debit the security account with any sum on account of the Bank’s payment to Libri.

The sum due from the Bank to the Claimant is subject to a set-off of sums admittedly due to the Bank in respect of the Claimant’s overdrawn trading account with the Bank, which I am informed is in the region of £127,000. I was told by Counsel that the precise amount of the set-off and the resultant liability of the Bank to the Claimant, including interest, would be capable of agreement. If any issues remain in that regard I will hear further argument from the parties, as well as any argument as to costs.