The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Tonio Mallia and Mr Justice Joseph Azzopardi, in the case ‘Maresco (Trading) Ltd v HSBC Bank Malta plc’, on October 31, 2014, held among other things that, where a foreign bank draft was deposited in a local bank account and not endorsed, the bank as mandatary of its client, the mandator, was entitled to reverse the payment if it resulted that the bank draft was fraudulent and could not be honoured. The fact that the bank first informed its client that there were no problems did not mean that it had renounced its rights.
Maresco (Trading) Ltd sold a number of air-condition units to a Nigerian company. Payment was made by way of a bank draft for $37,500 dated October 2, 2002.
Before dispatching the goods, Maresco asked HSBC Bank to deposit the foreign bank draft into the account on November 25, 2002.
Maresco stated it was led to believe by the bank’s assurances that the draft would be honoured, but required 18 days to clear it, according to banking practice. After the expiry of this 18-day period, Maresco’s bank draft was cashed by the bank.
A director of Maresco alleged that the bank assured him again that the bank draft had been cleared. However, on the March 5, 2003, HSBC reported to Maresco that there were problems with the bank draft.
HSBC proceeded to debit Maresco’s account of Lm14,311 and reversed the payment. The bank said that it discovered that the bank draft was fraudulent after two months from the expiry of the 18-day period after Maresco deposited it in its bank account and debited Maresco’s account with Lm14,311.
Maresco said that the bank acted abusively and, as a result, it suffered damages. Faced with this situation, Maresco took legal action against HSBC, requesting the court to declare that the bank acted negligently by debiting its account of Lm14,311.
The company requested the court:
• To order the bank to credit account Lm14,311;
• To declare that the bank was responsible for the damages suffered, owing to the negligent act of the bank;
• To liquidate the damages; and
• To order the payment of damages.
In reply, the bank disputed the legal action against it. It denied any wrong-doing and aid it was not to blame that the bank draft proved to be false. It expressly stated on the deposit slip that the bank reserved the right to debit the client’s account in case the bank draft was dishonoured. The fact that the bank informed Maresco that no problems appeared with the bank draft was without prejudice to its rights to debit Maresco’s account.
On February 9, 2011, the First Hall of the Civil Court upheld Maresco’s first claim, ordering the bank to credit Maresco’s account with €33,335 (Lm 14,311).
The court noted that the bank was relying on the its express reservation on the deposit slip.
“Customers are advised that the bank reserves the right to claim refund and/or debit their account in respect of effects which are unpaid or lost in transit (without loss of exchange where applicable) plus all charges.”
The first court felt that this reservation did not apply, in the circumstance, after the bank gave assurances on the validity of the bank draft.
In ‘ATG Co. Ltd v HSBC’ dated September 29, 2009, it was held that the court had to consider whether the reservation in small print was applicable. It had to be careful that a person did not escape his responsibility.
The bank put forward the argument that it never confirmed that the bank draft was cleared or that the amount would be paid. After the 18-day period, it was the practice of the bank to let the client draw and use the amount equivalent to the value of the cheque deposited, even if the bank had not yet received the payment for the value of the cheque. The bank said it had not guaranteed that the bank draft had been cleared. It said that it only gave the client the facility up to the value of the cheque.
The first court maintained that, although these distinctions made sense in the banking practice, it could not be used against the client unless these distinctions were explained properly to the client. It appeared that, when the bank notified a client that the bank draft was not blocked, it implied that the cheque was cleared. If the bank did not mean this, it should have been clearer to its client, pointed the first court.
If the funds were cleared, a client under normal circumstances should feel that no problems would arise and could freely proceed to send the goods. A client was not expected to predict the unforeseeable, that the bank draft was not valid: ‘ATG Company Ltd v HSBC (PA)’ dated September 29, 2009.
In addition, as the first court was not presented with sufficient evidence, it rejected the claim of damages by Maresco.
Aggrieved by the decision of the first court, HSBC entered an appeal. The bank insisted that it was expressly stated in writing on the deposit slip that it reserved the right to claim a refund and/or debit client’s account if the bank draft was not honoured. It said that it had not renounced its rights nor had it given any guarantees to neutralise the reservation.
The Court of Appeal said that this case concerned a cheque and not a bill of exchange. In ‘Denmison v Tonna’ dated November 30, 1926, it was held that, when a cheque was issued to order and endorsed, the endorsement changed the nature of the instrument and the provisions on bill of exchange became applicable. To have an endorsement, it was necessary to have the signature of the endorser – an endorsement could be done in blank. The signature had to be written on the instrument and could not be done by way of mandate: ‘C. Rizzo v Galea, Commercial Court’ dated January 12, 1943.
In this case, Maresco had not endorsed the cheque and in this respect the provisions on bill of exchange, article 140(1) and 193 of the Commercial Code, were not applicable.
As mandatory, the HSBC Bank was only obliged to cash the cheque and its responsibility did not go beyond this
Reference was made to J.A. Micallef’s Notes (page 286 “It is to be noted that delivery of a bill without there having been put the signature of the endorser does not amount to an endorsement in the strict sense of the word and would not, therefore, produce all those legal effects which derive from an endorsement.”
The Commercial Court explained in ‘Rizzo v Galea’ that in the absence of a signature on the instrument itself, in case this was granted to someone to collect money, the possessor of such an instrument was only a mandatory of the creditor in respect to such instrument.
The court maintained that HSBC only acted as mandatory of Maresco. Maresco gave a mandate to the bank to encash the cheque. A mandatory, however, was not obliged personally to make payment if the cheque was not honoured. It was obliged to act with diligence in performing its duty (article 1874 of the Civil Code).
As mandatory, the HSBC Bank was only obliged to cash the cheque and its responsibility did not go beyond this.
The fact that the bank accepted the mandate, took the cheque and credited the account of Maresco did not mean that the bank guaranteed payment.
In ‘Camilleri v Agius noe’ dated December 11, 1979, it was held that, when a bank accepted a cheque and credited the account of its client, this was done on condition that the cheque was honoured by the other bank. If the cheque was not honoured, the bank had a right to recover the funds and to debit its client.
The court was not of the opinion that HSBC confirmed clearance of the bank draft. It had not renounced its rights. It accepted to deposit the cheque subject to this condition and it could not be conclusively stated that this written agreement had been varied.
Besides, the representatives of the bank dealing with Maresco did not have authority to give guarantees on behalf of the bank.
The bank only acted as mandatory and it did not appear that the bank gave guarantees to pay the amount.
Even if the cashier at the bank might have told Maresco that the cheque had been cleared, it did not result that the bank was bound and had agreed to cash the cheque, if the bank draft was not honoured.
The bank had not given any guarantees that the bank draft was valid. This meant that the bank was entitled to reverse the payment if it results that the cheque was not cashed.
The bank as mandatory was not personally responsible. It did not result that the bank was negligent.
The transaction did not succeed in the circumstances, not owing to the negligence of the bank but for reasons altogether independent of the bank.
Maresco as mandator was bound to the bank, its mandatory, and not vice versa (articles 1881 and 1882 of the Civil Code).
In addition, Maresco did not show that it suffered damages by the act of the bank and, in this respect, it was difficult to request a remedy on the basis of this claim, concluded the court.
For these reasons on October 31, 2014, the Court of Appeal gave judgment by revoking the decision of the first court and dismissing all of Maresco’s requests.
Dr Karl Grech Orr is apartner at Ganado Advocates.