Bank of Ireland v Educational Building Society

• Jurisdiction: Ireland
• Judge: Keane, J.,MR JUSTICE FRANCIS D MURPHY,BARRON J.
• Judgment Date: 01 January 1999
• Neutral Citation: 1998 WJSC-SC 3359
• Court: Supreme Court
• Docket Number: [S.C.
• Date: 01 January 1999

BANK OF IRELAND v. EDUCATIONAL BUILDING SOCIETY

BETWEEN

THE GOVERNOR AND COMPANY OF THE BANK OFIRELAND

PLAINTIFF/APPELLANT

AND

EDUCATIONAL BUILDING SOCIETY

DEFENDANT/RESPONDENT

1998 WJSC-SC 3359

Keane, J.

Murphy, J.

Barron, J.

170/97

THE SUPREME COURT

Synopsis

- [1999] 1 IR 220 - [1998] 2 ILRM 451

Citations:

WATSON V RUSSELL 1862 3 B & S 34

JONES (RE) LTD V WARING & GALLOW LTD 1926 AC 670

BILLS OF EXCHANGE ACT 1882 S2

BILLS OF EXCHANGE ACT 1882 S29(1)

LEWIS V CLAY 67 LJ QB 224

CHURCHILL & SIM V GODDARD 1937 1 KB 92

TALBOT V VON BORIS 1911 1 KB 854

NATIONAL BANK LTD V O'CONNOR 1969 103 ILTR 73

RSC O.37 r1

CRAWFORD V GILLMOR 30 LR IR 238

FIRST NATIONAL COMMERCIAL BANK V ANGLIN 1996 1 IR 75

JONES V GORDON 1877 2 AC 616

JUDGMENT delivered the 23rd day of June 1998,by Keane, J.

1 The claim of the plaintiff (hereafter "the bank") is as the holder for value of nine cheques totalling £183,559 against the defendant (hereafter "the building society") as drawer of the cheques which were drawn upon Ulster Bank Limited in favour of the bank. Each of the cheques when presented for payment was dishonoured and returned unpaid to the bank marked "paymentcountermanded".

2 The building society having filed an affidavit in which they disputed the bank's claim, a motion for summary judgment on behalf of the bank was heard by Morris J. (as he then was). In a reserved judgment, he concluded that the claim should be sent for plenary hearing. From that decision, the bank have now appealed to this court.

3 The facts, insofar as they are not in dispute, are as follows. A company called Ballinorig Enterprises Limited (hereafter "the company") had a current account at the Tralee branch of the bank. Over a period of 15 months from September 1994 to January 1997, a series of cheques drawn by the building society on its current account with the Ulster Bank Limited in which the bank were named as payee was lodged by the company to the credit of its current account with the bank. Over the same period, the company drew cheques on their account with the bank which they delivered to the building society. Thus, four cheques totalling £81,155 drawn by the building society in favour of the bank were lodged to the company's account with the bank on the 18th January 1996. The building society say that they drew these cheques in favour of the bank and gave them to the company because the company had delivered them five cheques totalling £80,913 drawn by them on their account at the bank. The bank do not dispute that these cheques were dishonoured by them when presented for payment on the 23rd January 1996, i.e. the day that the first four cheques drawn by the building society in favour of the bank were stopped bythe building society. A further five cheques drawn by the building society on the 19th January 1996 and totalling £102,404 were similarly returned marked "payment countermanded".

4 It is not in dispute that similar transactions took place on a regular basis over the previous 15 months and that the company were engaged in the practice known as "kiting". Under the system of clearing cheques operated by the associated banks, approximately four days normally elapse before a cheque is presented for payment by the collecting bank to the paying bank and honoured or not, as the case may be. It is stated at paragraph 8 of the affidavit sworn on behalf of the bank by Mr. Neil Timlin, the manager of the branch, that:-

"The (bank) was in the habit of permitting its customer (the company) to draw against uncleared effects..."

5 It is not in dispute in the present case that the company was abusing the facilities it was being given by both the bank and the building society to draw cheques on their account (in the case of the bank) which were unsupported by funds and obtain cheques in favour of the bank (in the case of the building society) again unsupported by funds. In each case, the success of the scheme from the customer's point of view depended on the willingness of the bank and the building society to allow the customer to draw cheques or obtain chequesfrom the building society before the effects supporting the transaction were cleared.

6 The payee of the cheques drawn by the company on its account with the bank and presented to the building society was Martin Hartnett, one of the directors of the company. The company did not have an account with the building society, but Martin Hartnett did. In an affidavit sworn by Mr. Thomas Greene, the internal audit manager of the building society, he deposes that, to the best of his knowledge and belief, the building society had not previously been the victim of what he describes as a kiting fraud. By contrast, he says, the bank" as a clearing bank, is likely to have had regular experience of such frauds. Mr. Greene does not, however, in his affidavit explain how the building society first became aware that such a fraud had been perpetrated on them. In his affidavit, Mr. Timlin says that the bank instituted enquiries with the directors of the company on the 24th January to find out what was going on i.e. after the building society cheques had been returned. The bank were informed at that meeting that up to recently the building society had been "exchanging cheques with the company", but that it had altered its procedure "in the previous few days" and was now lodging the cheques to Mr. Hartnett's account. Mr. Timlin's affidavit goes on:-

"It appears that at that stage the (building society) discovered that the arrangement involved the kiting of cheques and it proceeded to countermand payment of the nine cheques issued in favour of the bank on the 18th and 19th of January 1996."

7 It was submitted by Mr. Nesbitt, S.C. on behalf of the bank that the affidavits filed on behalf of the bank and the building society did not disclose any issue of fact which justified the case being remitted for plenary hearing. The bank's claim was as a holder for value of the nine cheques and the fact that the drawing of the cheques by the building society in their favour had been procured, as the building society alleged, by the fraud of the company afforded no defence where it was not shown that the bank was aware of the fraud. He cited in support Watson v. Russell [1862] 3 B & S 34, affd. [1864] 5 B & S 968 and Jones (R.E.) Limited v. Waring and Gillow Limited [1926] AC 670. He submitted that, on the undisputed facts of the present case, the bank was a holder for value, since, in consideration of the delivery of the cheques payable to them, the bank had allowed their customer to draw cheques on its current account and the fact that the consideration moved from the promisee (in this case the bank) to a third party and not to the promisor (in this case the building society) wasimmaterial.

8 On behalf of the building society, Mr. Senan Allen submitted that the bank had not made clear in their affidavits the terms on which the company was allowed to draw cheques against uncleared effects: it was, however, clear that the building society had relied upon those cheques in issuing the nine cheques in favour of the bank upon which the latter now sued. He said that, in those circumstances it was clear that an issue of fact would have to be tried on plenary hearing. He also submitted that where the drawing of cheques had been procured by fraud, the payee was not entitled to enforce the payment of the cheques. He also urged that the action of the bank in entering into an agreement with the company under which the latter were paying a sum of£2,000 per month to the bank in recoupment of the bank's losses was inconsistent with their claim to be entitled to recover the same losses from the building society.

9 The issue before the High Court and which has arisen again in this court is as to whether the affidavits disclose a good defence to the bank's claim which necessitates the case being sent for plenary hearing at this stage. The issues of law and fact which arise cannot be conclusively resolved in favour of either party, unless, as is submitted on behalf of the bank, the affidavits do not disclose even an arguable defence to their claim. While that is an essential caveat to be borne in mind at this stage, the inquiry as to whether a gooddefence is made out on the affidavits requires at least some examination of what appear to be the applicable principles of law.

10 It should be noted at the outset that none of the nine cheques drawn by the building society in favour of the bank which have given rise to the proceedings can be equated in law to a banker's draft, i.e. a draft drawn by one branch of a bank on another branch or on the head office of the same bank. Banker's drafts are not cheques or bills, there being no distinct drawer and drawee. Although the identity of the drawer of the cheques in issue in the present case would undoubtedly afford comfort to the bank, they remained in law cheques, which had to go through the clearing system for presentation and honouring before the proceeds could be collected by the payee.

11 We are also not concerned in this case with the rights of a holder in due course of a negotiable instrument, such as a cheque. While s.2 of the Bills of Exchange Act, 1882, provides that "holder"

"means a payee or indorsee of a bill or note who is in possession of it or the bearer thereof"

12 it is clear that the payee is not a holder in due course, since, under section 29(1), such a holder is a person to whom a bill has been negotiated in good faith and for value. (See the dictum of Lord Russell of Killowen in Lewis v. Clay 67 LJ (QB) 224 approved of by the House of Lords in R.E. Jones Limited v. Waring and Gillow Ltd.) Where, as here, the payee sues the drawer on foot of the cheque, he will be defeated, like any other party to a simple contract, by the absence of consideration: in the case of cheques, however, like...