When Rules Collide: Liggett meets Simms
Alan L Tyree
Landerer Professor of Information Technology and Law
University of Sydney
When a bank pays a cheque, it does so with its own money.1 If it has authority to pay the cheque, it recovers payment by way of a reduced debt owed to its customer, that is, it is able to debit the account of the customer.
If the bank does not have authority to pay the cheque, then it is prima facie unable to debit the account. The legislature has seen fit to shift the loss onto the customer in certain circumstances, and the courts of common law and equity also devised certain "defences" for the paying bank.2 These rules have been supplemented by rules which allow the bank to recover from the payee of the cheque in certain circumstances where it may not be able to debit the customer with the unauthorised payment.
The purpose of this note is to examine two of these rules and to show that they cannot stand together. There is an inconsistency in the reasoning which forces a choice between the two rules.
The two rules
The most recent rule concerns the recovery of money paid by the bank under a mistake of fact. A series of cases has held that the bank may recover from the payee when the bank mistakenly pays a cheque which has been validly countermanded.3
The other rule is much older. It has been referred to as the "equitable defence", and it is best illustrated by consideration of the facts of the leading case, B. Liggett (Liverpool), Ltd. v. Barclays Bank, Ltd.4 The defendant bank negligently and contrary to instructions paid cheques of the plaintiff company which had been signed by one director only. The cheques in issue were drawn in favour of the trade creditors of the company. The Court held that as the liabilities of the company had not been increased by reason of the payments, the bank was entitled on equitable grounds to stand in the place of the creditors which they had paid.
The logic of the "countermand" cases was explained in some detail by Robert Goff J. in Barclays Bank Ltd v. W. J. Simms Son & Cooke (Southern) Ltd.5 Since payment of the cheque has been countermanded, payment is unauthorised. Since it is unauthorised, it cannot discharge the debt owed by the drawer to the payee. Since the debt is not discharged, there has been no consideration given by the payee, and it is therefore against good conscience for the payee to retain the mistaken payment. Nor, if it is relevant, is there any change of position on the part of the payee which would provide a defence against the recovery by the bank, for the payee may recover from the drawer of the cheque. Indeed, Robert Goff J. expressed pleasure at the outcome, believing that the bank was an innocent bystander caught in the dispute between the drawer and the payee.
The justification for the rule in Liggett's case, on the other hand, proceeds on the basis that:
"[the goods] had to be paid for, and they were in fact paid for from time to time by the cheques in question...which accordingly discharged a legal liability incurred by the company, because the people who supplied the goods had no notice that the position had in any way been changed."6
The reasoning of the cases cannot stand together. The bank cannot recover from the payee of the cheque if the unauthorised payment discharges the debt. The bank cannot debit the account if the unauthorised payment does not discharge the debt. There is no suggestion in any of the cases, nor can there be on principle, that the nature of the lack of authority is relevant. The effect must be the same whether the want of authority comes from an overlooked countermand or from an overlooked missing director's signature.
Both lines have been subject to harsh criticism. Writing about Simms case, Goode argued that the bank had ostensible authority to make the payment, and that the debt was consequently discharged.7 That analysis is reflected in the quotation from Wright J. above.
Goode also argued the closely related proposition that the paid cheque had been discharged, and that the payee no longer has any rights on it. If that is the case, then the payee has certainly given consideration for the payment, and may resist repayment to the bank.
Goode's arguments were clearly before the Court in Bank of New South Wales v Murphett,8 although none of the members of the Court mentioned his work. For some reason, the more important "ostensible authority" argument was not specifically addressed. The other argument, that the paid cheque had been discharged, was dismissed in a curious way. If the bank's claim succeeds, it was said, then the cheque had not in fact been paid.9 No authority was cited for this rather novel doctrine.
The Liggett line of cases has also come in for critical comment. Ellinger and Lee conclude that in order for the bank to succeed in such a case, it must show that there was a valid debt which was discharged by the wrongful payment and that it would be unconscionable for the customer to retain the benefit of the payment.10 They do not, however, address the question of how the unauthorised payment will discharge the debt.
Neither line of cases is satisfactory. It is undesirable that a payee of a cheque should be under a cloud of uncertainty about whether or not payment is final. It is equally undesirable that the unauthorised bank should decide which creditors are to be paid and which ones not! On the other hand, why should any of the parties receive a windfall because of a relatively minor banking error?
Whatever the ultimate solution to these rather intractable problems, it would seem that the Simms line of cases is firmly supported in Australia. In my view, this means that the Liggett defence can no longer be supported unless it is possible to devise some completely novel justification for it.
1 Foley v. Hill (1848) 2 H.L. Cas 28; Joachimson v Swiss Bank Corp.  3 K. B. 110.
2 The main statutory defences for the paying bank are found in the Cheques and Payment Orders Act 1986, s. 92 (Payment of a crossed cheque in good faith and without negligence); s. 94 (forged or unauthorised indorsements). Apart from the rules discussed in the text, the main common law defences for the paying bank are the Greenwood rule and the Macmillan rule: Greenwood v. Martins Bank Ltd  A. C. 51, London Joint Stock Bank v. Macmillan and Arthur  A. C. 777. Macmillan was not followed in Australia until 1981: Commonwealth Trading Bank of Australia v. Sydney Widt Stores Pty. Ltd. (1981) 55 A. L. J. R. 358.
3 Southland Savings Bank v. Anderson  1 N.Z.L.R. 118; Commercial Bank of Australia v. Younis  1 N.S.W.L.R. 444; Barclays Bank Ltd v. W. J. Simms & Cooke (Southern) Ltd.  1 Q. B. 677; Bank of New South Wales v. Murphett  V. R. 489.
4  1 K. B. 48; Re Cleadon Trust  Ch. 286; Shapera v. Toronto Dominion Bank (1970) 17 D. L. R. (3d) 122; Royal Bank of Canada v. Huber (1971) 23 D. L. R. (3d) 209.
5  1 Q. B. 677.
6 per Wright J. at page 59.
7 Goode, R. "The Bank's Right to Recover Money Paid on a Stopped Cheque" (1981) 97 L.Q.R. 254.
8  V. R. 489.
9 See the judgment of Starke J. at page 493.
10 Ellinger, E. P., and Lee, C. Y., "The 'Liggett' Defence: a banker's last resort"  1 L.M.C.L.Q. 459.