Is Liggett dead or just feeling poorly?
Alan L Tyree

A bank mistakenly makes an unauthorised payment to a creditor of its customer. There are many such examples, but common ones are:

• payment of a stopped cheque;
• payment of an improperly authorised cheque, e.g., a cheque signed by only one director where the bank's mandate calls for two or more; and
• payment under a letter of credit against a non-complying presentation of documents.

Under what circumstances should the bank be able to maintain a debit of the customer's account even though the payment was unauthorised?

Until recently, it was happily assumed that the bank could maintain the debit under the principle established in Liggett (B) Liverpool Ltd v Barclays Bank Ltd [1928] 1 KB 48.

In Liggett, the defendant bank negligently and contrary to instructions paid cheques of their customers, the plaintiff company, which had been signed by one director only. The cheques were drawn in favour of trade creditors of the company in payment for goods supplied to the company in their business.

The Court held that, as the liabilities of the company had not been increased by the payments, the defendants were protected from liability on equitable grounds. The bank was entitled to stand in the place of the creditors whom they had paid.

The decision in Liggett assumes that the debt to the creditor was paid, but this conflicts with a long-standing policy of the common law: an unauthorised payment by a third party does not, of itself, discharge a debt: see City Bank of Sydney v McLaughlin [1909] HCA 78 and the discussion by Austin J in Vikery v JJP Custodians Pty Ltd [2002] NSWSC 782.

The debt will be discharged if the third party payment was authorised by the debtor or if the debtor adopted or ratified the payment. Authorisation may be express or implied, and ratification may be inferred from the actions of the debtor. In certain circumstances, it may be possible to infer ratification from the inaction of the debtor: see, for example, the discussion in City Bank of Sydney v McLaughlin [1909] HCA 78.

In Liggett itself, the company apparently accepted the benefits of the payments to trade creditors. It is easy to infer ratification under the circumstances.

This aspect of Liggett was often overlooked, and it seemed to be assumed that payment by the bank, of itself, discharged the debt.

In Crantrave Ltd v Lloyds Bank PLC [2000] 3 WLR 877. A garnishee order nisi was served on the bank to secure the funds of its customer. A few weeks later, the bank paid the judgment creditors a sum of \pounds13,497. The garnishee order nisi was never made absolute, and the proceedings founded on it were stayed. The customer went into liquidation, and the liquidator sought repayment by the bank of the amount paid to the judgment creditors. The bank argued the Liggett defence.

In dealing with the argument, Pill LJ said (at p 883):

It is a startling proposition that bankers can pay sums to a third party out of a customer's account because they believe the customer to be indebted to that third party. I see no difference in principle between a judgment debt and other perceived debts. As against a customer, a contrary principle would place the bank in a position to act as debt collector for creditors of the customer. It would be for a customer who contested a creditor's claim then to seek relief. The bank could decide in what priority the claims of creditors were to be met out of the sums in the account, without the customer having recourse against the bank. A bankruptcy or liquidation may occur shortly after a payment, as in this case, with possible effects on the rights of creditors generally.

The Court indicated that there Would be circumstances in which the Liggett defence might succeed. These included unjust enrichment, where the customer maintains the benefit of the payment or where the creditor obtains a double payment. However, the onus is on the bank to establish some evidence of unjust enrichment: see also the comments of Austin J in Vickery v JJP Custodians Pty Ltd [2002] NSWSC 782 and Hargrave J in Popal v Accounts Control Management Services Pty Ltd [2010] VSC 412.

Crantrave was accepted and applied in Swotbooks.com Limited v Royal Bank of Scotland PLC [2011] EWHC 2025 (QB). Swotbooks operated an online book selling business. On receipt of an order and payment by a customer, Swotbooks would in turn order books from Libri, a German company. Libri would dispatch the books by courier to the customer.

The agreement between Swotbooks and Libri required Swotbooks to open a standby letter of credit in favour of Libri. The defendant bank provided the letter of credit. The credit called for payment against certain documents. The bank in fact paid against documents that did not comply with the requirements of the letter of credit.

In spite of the error, the bank debited Swotbooks account with the amount of the payment. The bank attempted to rely on the Liggett defence, arguing that the case fell within the exceptional circumstances described in Crantrave. In particular, it was argued that Swotbooks had already been paid by its customers so that allowing recovery would, in effect, be 'double dipping'. The court rejected the argument, noting that the debt to Libri was not discharged by the payment.

An interesting aspect of the case was that the standby credit contained a conclusive evidence clause to the effect that any payment under the credit was, as between Swotbooks and the bank, conclusive evidence that the bank was liable to make the payment.

The bank decided not to rely on the conclusive evidence clause, obviously preferring to lose the case rather than risk having the clause declared void under the Unfair Contracts Terms Act 1977 (UK).

In Majesty Restaurant Pty Ltd (in liq) v Commonwealth Bank of Australia (1998) 47 NSWLR 593 the bank mistakenly paid cheques in favour of trade creditors. Hunter J held that the debts were discharged since the creditors could rely on the ostensible authority of the bank to make the payments.

The argument as to implied authority was rejected in Lloyd's Bank plc v Independent Insurance Co Ltd [2000] QB 110. Waller J in that case found actual authority, but continued to carefully examine the arguments about ostensible authority. He noted, among other arguments, that the payee did not rely on any representation about authority of the bank. As Waller J said at 123:

In relation to a simple payment of money, it is much more difficult to see why there is any reliance at all on authority particularly in a case such as the present where the money is simply going to be placed to the credit of an account at a bank, and the only matter of moment is whether the money arrives or whether it does not.

Where the payments are to trade creditors, it will usually be easy to infer ratification since the customer/payer will usually have continued to trade and take the benefits of the payments.

Majesty Restaurant was briefly considered in Popal v Accounts Control Management Services [2010] VSC 412 which was an application for leave to appeal out of time. There it was argued that Crantrave would not apply in Australia because of the decision in Majesty Restaurant. Hargrave J refused to accept that this would render the appeal hopeless, noting that Majesty Restaurant proceeded on the basis that payments had the effect of discharging the customer's trade debts, a point not conceded in Popal.

The scope of the Liggett defence has always been uncertain. Crantrave and cases following have certainly limited the application of the defence and have, at the very least, made the bank's task more difficult. The final approach in Australia is still uncertain.

Unrestricted, Liggett has the effect of making the customer responsible for the bank's mistakes. The restrictions placed on Liggett by the Crantrave line of cases provide a sensible balance between the interests of the bank and its customers.