It is a common enough scene in the legal department of a bank: a banker rings to seek advice on the bank's legal position after it has paid money out of an account without the customer's authority. Perhaps the bank made a payment by mistake omitting to realise there was a technical breach of mandate, for example: where two signatures were required and only one was actually given. The customer is now complaining that the payment ought not to have been made and is demanding the bank reimburse the account with the sum paid out. The bank however knows that the recipient of the funds was owed the money by the customer and is highly unlikely to be sympathetic to a claim by the bank for return of the money on the basis of payment by mistake of fact. The bank remembers that useful old shield, the Liggett defence (Liggett (Liverpool) Ltd. v Barclays Bank Ltd [1928] 1 KB 48). The Judge in Liggett said: "... the equity I have referred to ought to be extended even in the case where the cheque was paid out of the credit balances, and was not paid by way of overdraft, so that the banker will be entitled to the benefit of that payment if he can show that the payment went to discharge a legal liability of the customer. The customer in such a case is no worse off, because the legal liability which has to be discharged is discharged, though it is discharged under circumstances which at common law would not entitle the bank to debit the customer." The customer can now claim until he is blue in the face that the bank should recredit his account, but the bank will consider itself justified in refusing to do so knowing that it would be pointless for the customer to sue for its return when the bank can show that it has satisfied a due debt to a third party.
Crantrave v Lloyds Bank plc heard in the Court of Appeal on 13 April 2000 now threatens to upset the legal department's sense of security in such a case. That case has looked rather more closely at the circumstances in which Liggett might be applied, and concluded that the debt which the bank paid by debiting the account without authority was not in fact discharged. The Court emphasised that as a matter of established English Law it was impossible for a person to discharge the debt of another person, although the judgment does not elaborate on this theme. It ordered the repayment of the sum debited to the account without authority and required the bank to pursue an action against the recipient on the basis of payment by mistake of fact. The sum in question was paid by the bank out of the account upon receipt of a garnishee order nisi to the judgment creditor. (The bank ought to have only paid the funds out of the account on receipt of the garnishee order absolute - which in this case was never actually made.) The customer from whose account the payment was made subsequently went into liquidation, and the claim for reimbursement was made by the Liquidator.
On the face of it, it is quite difficult to see why the Court decided that in Liggett the debt was discharged by the bank whereas in Crantrave it was not. The judgment in Crantrave stresses that "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" and concluded that the discharge of the debt needed the authority or subsequent ratification of the debtor. The point is that in Liggett, even though the actual cheque on which the bank acted to debit the account bore only one of two necessary signatures, the signing director did have the company's authority to deal with trade debts. In Crantrave, the bank acted on an incomplete court order and there was no question of implied authority to pay by the customer.
Astonishingly, the Court also concluded that there was no evidence in this case of unjust enrichment by the customer even though a part of the judgment debt had been paid by the bank. The bank was left with only one alternative, to pursue a claim against the recipient for recovery on the basis of payment by mistake of fact.
The lesson for banks in such a case in future is that they will have to be able to prove that the payment discharged the debt or failing even that, that re-crediting the account would unjustly enrich the customer.
For further information, please contact Ruth Pedley by e-mail at ruth.pedley@cms-cmck.com or by telephone on +44 (0)20 7367 2098.
