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GENERAL BANK NEDERLAND
(FORMERLY CREDIT LYONNAIS BANK NEDERLAND NV)
EXPORT CREDITS GUARANTEE DEPARTMENT
 EWCA CIV 2165 (23RD JULY, 1997)
IN THE SUPREME COURT OF JUDICATURE QBCMF 95/1705/B
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
(MR JUSTICE LONGMORE )
ROYAL COURTS OF JUSTICE
LONDON W2A 2LL
WEDNESDAY 23RD JULY 1997
LORD JUSTICE STUART-SMITH
LORD JUSTICE HOBHOUSE
LORD JUSTICE THORPE
GENERALE BANK NEDERLAND NV Appellant (formerly Credit Lyonnais Bank Nederland NV)
EXPORT CREDITS GUARANTEE DEPARTMENT – Respondent
MR ANDREW SMITH QC. and MR RICHARD SLADE (instructed by Messrs Linklater and Paines, London EC2V 7JA) appeared on behalf of the Appellant – (Plaintiff)
MR JONATHAN HIRST QC, MR GRAHAM DUNNING and MR JOHN SNIDER (instructed by Messrs Clyde and Co, Guildford, Surrey) appeared on behalf of the Respondent – (Defendant)
BANKING AND FINANCE:- Banker’s guarantees issued by the Export Credits Guarantee Department (“ECGD”) – Allegation that guarantees were issued as part of a scheme to defraud the Bank – How treated
JUDGMENT (As approved by the court)
LORD JUSTICE STUART-SMITH:
The Plaintiff Bank’s claims arise from five banker’s guarantees issued by the Export Credits Guarantee Department (“ECGD”) between 1985 and 1988. Its case is that the guarantees were issued as part of a scheme to defraud the Bank, the parties to the scheme being a Mr Chong and a Mr Pillai, a senior “underwriter” in the Bank Guarantee Division (“BGD”) of ECGD, who dealt with the underwriting of the five guarantees. The scheme was that in reliance upon the guarantees the Bank should buy forged bills of exchange from companies owned or used by Mr Chong. Bills bought by the Bank with a face value of some £12 million were dishonoured on presentation. Mr Pillai retired from ECGD on 31 May 1988, and died on 30 November 1988. Mr Chong disappeared towards the end of 1988 or shortly thereafter.
The Bank brought claims against ECGD both in contract, claiming that ECGD’s guarantees secured payment of bills, and in tort, claiming that ECGD are vicariously liable for the acts of Mr Pillai in authorising the underwriting of the guarantees, which was his essential role in the scheme. These claims were dismissed by the Judgment of Longmore J dated 29 September 1995.,  1 LI L R 200). The Bank appeals against the Judge’s decision to dismiss the claim in tort and also against his decision to dismiss the claim in contract under one of the guarantees, a Comprehensive Banker’s Guarantee (“CBG”) dated 23 October 1985. The Bank does not appeal in relation to the contractual claims under the other four guarantees (which were Specific Banker’s Guarantees or “SBGs”).
ECGD is a department of the Secretary of State for Trade and Industry. Sections 1 and 12 of the Export Guarantees and Overseas Investment Act 1978 (now replaced by the ) empowered the Secretary of State for the purpose of encouraging trade with other countries to make arrangements through ECGD to give guarantees to persons carrying on business in the UK.
During the period relevant to this action, ECGD operated through two headquarters in London and Cardiff and nine regional offices. The BGD, which was based in the London headquarters, was disbanded on 1 July 1991. On 1 December 1991, ECGD’s short term credit business was privatised, the nine regional offices and the Cardiff HQ was sold.
ECGD supported UK exporters by indemnifying them in the event of default on the part of their overseas buyers, the exporters would be paid part (generally 90%) of the purchase price. The standard such policy to the exporters was a Comprehensive Short Term Guarantee (“CST”), although ECGD also issued Comprehensive Extended Terms Guarantees (“CXTs”). The essential difference between CSTs and CXTs was that the latter allowed longer periods for both delivery of and payment for the guaranteed export.
ECGD also promoted exports by issuing guarantees to banks in order to encourage them to provide finance to exporters. They were issued by staff in the BGD, following authorisation by an underwriter such as Mr Pillai. There were two types of banker’s guarantees, namely CBGs, which subject to a financial limit guaranteed any number of export transactions, provided they had a credit period of less than two years, and SBGs, which guaranteed finance for specific transactions and had a credit period of between two and five years.
The CBG immediately relevant in this case was a Bills or Notes guarantee. Under such a guarantee, the bank financed the export by purchasing bills or promissory notes accepted or issued by the buyer, or, as some CBGs allowed, by making advances against unaccepted bills.
As for SBGs, ECGD issued a SBG (Purchase-Interest) form of guarantee, whereunder a bank would purchase bills or promissory notes, and a SBG (Advance/Purchase-Interest) guarantee, whereunder a bank might make advances against bills of exchange/promissory notes or purchase them.
The Plaintiff Bank’s head office is in Rotterdam. At the times relevant to this action, it had UK branches in London and Manchester. The fraud was practised upon the London branch, whose managers at the material times were Mr Herod and Mr Kellner. The Bank was a subsidiary of the French bank, Credit Lyonnais, having changed its name to Credit Lyonnais Bank Nederland BV from NV Slavenburg’s Bank in 1983 following the acquisition of its shares by the French bank. Since these proceedings were brought, Singer and Friedlander has acquired part of the business of the UK branches and the Plaintiff has been acquired from Credit Lyonnais by Generale Bank NV and changed its name to Generale Bank Nederland NV.
Mr Chong and his companies
Mr Chong, who moved to England from Singapore in about 1980, was introduced to the Bank in November 1980 and shortly afterwards opened an account with the Bank. He operated through numerous UK and other companies. By the end of 1980 at least one of his companies, Western International (Textiles) Limited, had applied to ECGD for CST cover. Thereafter Mr Chong and his companies dealt with the Bank and with ECGD on an increasing scale until about the end of 1988.
The Banker’s Guarantees
In essence, the fraudulent scheme worked as follows: ECGD, acting pursuant to the authorisation of Mr Pillai, would underwrite Banker’s Guarantees to support the provision of finance by the Bank to Mr Chong’s companies, and Mr Chong would draw upon the Bank’s facilities by fraudulently selling to the Bank bills of exchange with forged buyer acceptances in relation to imaginary export contracts.
The five banker’s guarantees which led to losses for which the Bank claims are the following:
(a) a CBG (Bills or Notes) (CBG 8) dated 23 October 1985 by which ECGD guaranteed payment to the Bank of “Guaranteed Instruments” purchased from Sycamore Holdings Limited (“Sycamore”) and Westred Limited (“Westred”), two of Mr Chong’s companies. Seven of the bills of exchange bought from Westred were unpaid, causing loss of £3,725,990.80.
(b) a SBG (Advance/Purchase-Interest) (SBG 1) dated 22 December 1987 by which ECGD guaranteed payment to the Bank of six bills of exchange drawn on Texasgulf Inc and purchased from Sloane International (UK) Limited (“Sloane”), another of Mr. Chong’s companies. Four of the bills purchased from Sloane were unpaid, causing loss of £1,211,173.05.
(c) a SBG (Advance/Purchase-Interest) (SBG 2) dated 8 January 1988 by which ECGD guaranteed payment to the Bank of six bills drawn on Newmont Mining Corporation and purchased from Tempest Diesels Limited (“Tempest”). Five of the bills purchased from Tempest were unpaid, causing loss of £3,392,826.20. Tempest, which was owned by a Mr Allam, not Mr Chong, was introduced to Mr Chong by Mr Pillai and was used as a “fronting” company for the fictitious deal.
(d) a SBG (Purchase-Interest) (SBG 3) dated 8 April 1988 by which ECGD guaranteed payment to the Bank of six bills of exchange drawn on Cooper Industries Inc (“Cooper”) and purchased from Westred. All six bills were unpaid, causing loss of £2,300,106.29.
(e) a SBG (Advance/Purchase-Interest) (SBG 4) dated 8 April 1988 by which ECGD guaranteed payment to the Bank of six bills of exchange drawn on Cooper and purchased from Westred. All six bills were unpaid, causing loss of £1,581,323.30.
CBG 8 and the fraud in relation to it
It is necessary to set out substantial parts of CBG 8:
“THIS GUARANTEE is given on 23 October 1985 by the Secretary of State, acting by the Export Credits Guarantee Department (hereinafter called “the insurer”) to Credit Lyonnais Bank Nederland NV of 4 Old Park Lane, London, W1., (hereinafter called “the Bank”).
WHEREAS Sycamore Holdings Limited and Westred Limited of 27/29 Albert Embankment, London, SE1, are each holders of a Comprehensive Short Term Guarantee numbered CSTP/629107/1084 issued by the Insurer; and
WHEREAS the Bank has entered into an agreement severally with the said Sycamore Holdings Limited and Westred Limited (hereinafter severally called “the Exporter”) dated 22 October 1985 (hereinafter called “the Bank Facility”) in pursuance of which the Bank will subject inter alia to the giving of this Guarantee, make advances to the Exporter in respect of certain bills of exchange drawn by the Exporter and will purchase from the Exporter without recourse certain accepted bills of exchange and promissory notes
NOW THEREFORE IT IS HEREBY AGREED as follows:-
(1) “Guaranteed Instrument” means any sterling bill of exchange drawn by the Exporter and accepted by a buyer and any sterling promissory note issued by a buyer, being a bill or note –
i which has been purchased before its maturity date by the Bank without recourse between 1 October 1985 and 30 September 1986 (both dates inclusive); and
ii which has a maturity date less than 2 years from the date of exportation of the goods to which the bill or note relates; and
iii to which such written notice suspending cover by the Insurer as is specified in paragraph 3 hereof does not apply; and
iv in connection with which the Exporter has given a warranty to the Bank in the form set out in the Schedule hereto, or in such other form as may from time to time be prescribed by the Insurer;
(2) “Face Value” of a bill of exchange or promissory note means the amount, other than interest, expressed to be payable thereon;
and, at any time when any Guaranteed Instrument is 6 months or more overdue for payment, the Insurer may require the Bank to surrender to the Insurer –
i all Guaranteed Instruments duly endorsed in favour of the Insurer which are then in the possession of the Bank and which have been issued or accepted by the defaulting buyer; and
ii such bills of exchange duly endorsed in favour of the Insurer in respect of which Guaranteed Advances are then outstanding, as may be specified by the Insurer in relation to that buyer; and
iii all documents of title to goods attached to such Guaranteed Instruments or such bills of exchange;
and, upon such surrender, the Insurer will pay to the Bank an amount equal to the total Face Value of the Guaranteed Instruments at the date of such surrender and the aggregate amount of Guaranteed Advances then outstanding in respect of bills of exchange so surrendered; such payment shall be a full and complete discharge of the liability of the Insurer hereunder in respect of that buyer.
Without ECGD’s agreement in writing there was a limit to its liability of £3,750,000 and an overall limit of £4,700,000; claims had to be notified to ECGD by 31 March 1989 (clauses 4 and 5).
Between December 1985 and February 1986, the Bank purchased 11 forged bills of exchange under CBG 8. In each case the following documents were provided by Mr. Chong, who attended personally on Mr Herod:
TO: CREDIT LYONNAIS BANK NEDERLAND N.V., 4 OLD PARK LANE, LONDON W1, UK.
COMPREHENSIVE BANKER’S GUARANTEE (BILLS OR NOTES) NO 019/85/999/692107/5
i relates to the payments for goods which have been exported from the United Kingdom (which expression shall be deemed to include the Channel Islands and the Isle of Man) evidence of such exportation together with a true copy of the corresponding invoice being attached hereto; and
ii has been drawn on or issued by a buyer in accordance with the terms of a contract which we have insured under the Credit Guarantee referred to in the recitals to the above-mentioned Guarantee and in respect of which –
a the Credit Limit or Extended Terms Limit for the buyer (as defined in such credit insurance Guarantee) is not exceeded; and
b we have fully complied with all terms and conditions of the Credit Limit or Extended Terms Approval, as appropriate, and of the credit insurance Guarantee;
The schedule identified the relevant bill.
It was not the Plaintiff’s case that Mr Pillai had forged any of these documents. The Bank’s readiness to purchase bills that had already been supposedly accepted was essential to the fraud. If the Bank had adopted the usual practice whereby the exporter hands to his bankers the unaccepted bills of exchange, the original bills of lading, the invoice and any other requisite documents for presentation to the buyer through the banking system, fraud of the kind perpetrated here would have been avoided.
All eleven bills were dishonoured on presentation. Seven were never honoured. The other four were not honoured in the sense of being paid by the acceptor’s bank at the time and place indicated on the bills. But by various mechanisms Mr Chong was able to get funds to the Bank, as a rule from the proceeds of subsequent frauds. On 14 February 1989 shortly before the expiry date for making a claim, but about 30 months after dishonour, the Bank submitted written claims to ECGD in respect of the dishonoured bills. Those drawn by Westred Ltd on Transtrade S.A. totalled £1,350,288.60; those drawn by Westred Ltd on Delmonico Overseas Securities Inc totalled £325,293.62; and those drawn by Westred Ltd on Delmonico Foods (UK) Ltd totalled £2,050,408.50. It was the rejection of these claims that led to the action in relation to CBG 8.
The claim in contract under CBG 8
In order to succeed the Bank have to establish that the forged bills are ‘Guaranteed Instruments’ within the meaning of clause 1(1) of the CBG, namely a ‘sterling bill of exchange drawn by the Exporter and accepted by the buyer’ which satisfies the remaining conditions of the clause. The Judge held that it was not; he said that ‘accepted’ was not the same as ‘purportedly accepted’. Although Mr Smith QC on behalf of the Bank submits that the Judge was wrong, I do not think he was. The Judge’s construction is consistent with the other provisions of the guarantee, in particular with the concept as instrument ‘which has been presented for payment’ which implies genuine instructions given by an existing buyer to his banker to honour the bill on presentation at the nominated time and place (see clause 2(b)). It is also consistent with the concept of a guarantee where the liability of the guarantor or surety is co-extensive with that of the principal debtor and is secondary to that liability. If there is no principal debtor, the instrument cannot be a guarantee. It could be an indemnity; but in my judgment the CBG, quite apart from its name, has the hallmark of a guarantee and not an indemnity. Furthermore it is consistent in my judgment that S.24 of the Bills of Exchange Act 1882 which provides that ‘where a signature on a bill is forged ….. it is wholly inoperative’ unless there is an estoppel. I do not see how the bill can be accepted when the acceptance is wholly inoperative.
Mr Smith submitted that the expression ‘Guaranteed instrument’ had to be construed in the light of the document as a whole. The warranty referred to in clause 1(i)(iv), he submitted, was for the benefit of ECGD, and because the Department insisted on a warranty in the prescribed form, it showed that the Department was taking the risk that the acceptor did not exist. He relied upon the decision of this Court in First Sport Limited v Barclays Bank plc  1WLR 1229, where it was held on the construction of a cheque guarantee card that the word ‘cheque’ included a forgery purporting to be a cheque. I derive no assistance from that case, which turns on the particular language used, other than the proposition which is not controversial, that if the meaning is not clear one must have regard to other provisions of the document to assist in its construction.
But this warranty is primarily designed to ensure that the goods are exported; the favourable terms provided by ECGD are only available in respect of exported goods and ECGD has no power to give credit except in the case of exports.
Mr Smith also sought to mount an argument based on the similar language of the SBGs. By clause 1(a) ‘Guaranteed Instrument’ means any accepted bill of exchange….
(i) in connection with which the Bank has taken all reasonable steps to satisfy itself as to the validity and enforceability in the Buyer’s country specified in paragraph 1 of the first Schedule’.
There is also a similar warranty to that found in clause 1(1)(iv) of the CBG. Mr Smith’s argument is the same as with the CBG namely that since clause 1(a)(i) is for the benefit of the ECGD it shows that the Department and not the Bank is taking the risk of fraud in relation to the bills. The argument is obviously somewhat stronger in this case; but I am not persuaded that it is correct. And in any event it is not permissible to construe the CBG by reference to a wholly different document, albeit one emanating from the same source.
Accordingly in my judgement the claim in contract on CBG 8 fails.
ECGD raised a further defence to the contractual claim on CBG 8. They contended that the contract was induced by misrepresentation. The Judge found that there were misrepresentations contained in the reports on Chong’s companies which the Department required before issuing CBG 8. He did not find that these misrepresentations induced the contract; but, for reasons which I do not find altogether easy to follow, the Judge seems to have thought that the misrepresentations afforded the Department an additional defence to the contractual claim under CBG 8. In the light of my conclusion on the construction of ‘Guaranteed instrument’, it is not necessary to deal with the matter at length, since it does not avail Mr Smith to succeed on this issue of misrepresentation alone. But Mr Hirst QC for the Department sought to uphold the Judge’s conclusion, because he submitted that it had an important bearing on the issue of causation in tort. Again in the light of the conclusion which I have reached on the claims in tort, I do not find it necessary to deal with the matter in any great detail. It is dealt with at length in the judgment at p210-219. Nevertheless in deference to the argument and because it is an important part of the history I think it right to deal with this point as briefly as I can.
It was a standard part of ECGD’s procedure that a Bank should provide a general report on the exporter. As far as Mr Pillai and Chong’s companies were concerned the procedure seems to have been more honoured in the breach than the observance; the previous year’s reports had been sought and given by the Bank, but they arrived after the relevant CBG was issued. Nevertheless on 30 September 1985 Mr Pillai sent a note to Mr Stewart, an executive officer in Mr Pillai’s department, asking for full reports on all exporting companies. The request was passed on to the Bank; they were asked to provide reports on Westred, Sycamore and Western International (London) Ltd as soon as possible. Mr Murphy handled the matter for the Bank. ECGD’s form ECG 1635 was sent to the Bank on 3 October 1985. This indicated that ‘a general report by the Bank Manager on the Exporter is required and this should cover the following points -’. There are then set out 13 topics. Mr. Murphy returned the reports to Mr Stewart on 7 October. The Judge said that there was misrepresentation in answer to three of the questions as follows:-
The Judge said this at p216 (column 2):
‘In the present case, the Bank had no factual basis from which it could truly have concluded that management of the 3 companies on which it was writing reports was respectable or trustworthy. The Bank knew very little about Mr Chong and had seen no evidence which supported the transactions which he claimed to be making. Mr Herod was unable to say in his evidence what the respects were in which management (by which he could only mean Chong personally) was able and efficient. He had himself been asking for accounts for Sycamore but none had been forthcoming. As long ago as February 1985 head office in Paris had been asking for a family tree and consolidated accounts. Nothing had been forthcoming. That was not indicative of high ability or efficiency. In my view the Bank was giving a favourable answer to this question without having any foundation to support the answer.’
Mr Smith submitted that this was not a serious misrepresentation and the Bank could probably have answered the question ‘we are not in a position to form a judgement’. In my opinion that would not have been a full and frank answer, nor does it accurately summarise the Judge’s conclusions. It was a serious misrepresentation.
Mr Smith does not dispute that there was a misrepresentation. He submits that it had no causative effect. It is true that the Judge said that he did not consider that on its own a full answer to question 9 would have made any difference. That may be so; but it is the combined effect of the misrepresentations that matter.
The Judge held that this was a misrepresentation because of the Bank’s experience with certain bills drawn on Arno Finance Ltd. The history is set out at p215-216 of his judgment. It is only necessary to set out the Judge’s findings in relation to the 1st, 6th and 9th Arno Bills.
Of the 1st Arno Bill purchased under CBG 1 the Judge said at p215:
“Some time before 14 July 1983 the Bank had received a copy of Arno’s purported irrevocable instructions to American Express to remit £392,153 out of monies from a forthcoming letter of credit. Mr Herod obtained the apparent confirmation of American Express that they held the original letter of instructions and would remit that sum on receipt from The Bank then received the first Arno bill drawn by WIL on Arno on 18 August 1983 for £257,995.39 purportedly for sale of hospital equipment to Lagos. It was apparently accepted payable at American Express in London on 25 November 1983. The transaction had originally been described to Mr Herod as an export of paper to Punch Nigeria Ltd and there was no explanation for this change.
When the Bank applied for payment they were first told that there were insufficient funds and secondly in December 1983 to “Refer to Acceptor”. In fact the bill was paid 5 months later by a draft drawn on Lloyd’s Bank. Mr Herod could offer no explanation for this series of events and could see now that the underlying sale was a sham transaction. Mr Brooker of the Bank accepted that the method of payment was unusual.”
Of the 6th Arno bill purchased under CBG 5 he said at p215:
“This Arno bill was drawn on 18 January 1985 payable at National Westminster Bank on 17 July 1985 for Swiss Francs 641,719.80. The Bank applied for payment on 11 July but received a letter from National Westminster stating that they returned the draft “as we do not hold the account in the name of Arno Finance Ltd”. The Bank made no attempt to pursue the purported acceptor but proceeded to help itself from sums available in Westred’s account. It seems that when the Bank purchased the bill, the sterling equivalent of the face value of the Swiss Franc bill was transferred by the Bank to a blocked deposit on about 22 January. That sum was transferred back from the blocked deposit into Westred’s account and on the due date for payment the amount of the bill was debited to Westred’s account. A contemporaneous note on National Westminster’s letter of 15 July says that the bill was handed to Chong on 18 July. Neither Mr Herod nor Mr Murphy, the head of the Bank’s securities department, could give any rational explanation of these events. Mr Herod said that Chong had explained that he would pay the bill since he had been paid direct by the Buyer. I doubt whether Mr Herod asked or Chong gave that explanation because it would immediately give rise to the further question whether a buyer/acceptor would be likely to pay his seller direct without asking for the cancellation and return of the bill. In fact the Bank ought not to have returned the bill to Chong at all but should have returned it to the acceptor.”
Of the 9th Arno bill purchased under CGB 7 the Judge said at p216:
“Meanwhile there was the 9th Arno bill already purchased under CBG 7. This was dated 5 March 1985 and payable on 3 August 1985. The Bank applied to National Westminster for payment on 29 July 1985 and received the response “We do not maintain an account in this name.” This bill was, in fact, paid on 7 August 1985 by Mr Macauley, a gentleman unknown to Mr Herod or Mr Murphy. Mr Murphy noted an internal Bank document to this effect and clearly knew about it at the time. Again no suspicion seems to have been aroused.”
CBG 8 (and if relevant CBG 9) were renewals of the facilities granted under CBGs 5 and 6 which in turn replaced those under CBGs 3 and 4.
The Judge thought that the only Arno bills that gave rise to difficulty were the 6th, 7th and 8th bills. He was in fact in error so far as the 7th and 8th bills are concerned because these were not dishonoured until after the report by the Bank.
The Judge expressed his conclusion in these terms at p217:
“In my view, however narrowly one construes the question on the report form, the Bank did misrepresent the position by saying that no difficulties had been encountered in operating the facility due for renewal. The dishonour of three bills on the basis that the acceptor had no account with the Bank where the bills were accepted as payable is a serious difficulty, even though the drawer (against whom the bank had no legal right of recourse) was able to arrange payment within, at most, a month. Mr Murphy accepted (Day 12 page 63) that it was unusual and odd for a bill to be returned by a bank (where it was accepted as payable) with a statement that the acceptor had no account at that Bank. The fact that National Westminster had paid previous bills does not mean that there was not a difficulty with these bills. To say that no difficulty was experienced was, in my view, to misrepresent the position. I will add (though it may be unnecessary) that while it is no doubt right to construe Question 12 as referring to the precise facility due for renewal, difficulties with facilities given to associated companies should have been referred to in answer to Question 13.”
He acquitted Mr Murphy and Mr Herod of wilful misrepresentation. Although the Judge was mistaken about the 7th and 8th Arno bills, the circumstances of the 1st and 9th were in my judgement such as to justify his conclusion of misrepresentation particularly having regard to the answer to question 13 as well as that to question 12.
Again, while not challenging the Judge’s finding of misrepresentation, Mr Smith sought to play down its materiality. He submitted that the Bank could have answered by saying:
‘Previous bills have been dishonoured upon presentation on the basis that the acceptor had no account with the Bank where they were accepted but payment was arranged by the drawer within at most a month’.
For my part I do not think this answer gives the full picture. But in any event it is not what the Bank said. In my view what they did say was a serious misrepresentation.
Mr Smith’s real point on this aspect of the case has more substance. He submits that in order for ECGD to obtain rescission of the contract CBG 8 they must show that the misrepresentation induced the contract. (see Smith v Chadwick (1884) 9 Appeals 187, per the Earl of Selborne L.C. at p190 and Lord Blackburn at p200). The Judge made no such finding. What the Judge said was this at p218:
“If in October 1985 Pillai had already been corrupted, it could be said that the guarantee had been issued as a result of that corruption rather that of any misrepresentation. On the facts it seems to me that Pillai had probably been corrupted at this stage of the history. His wife was employed by one of Chong’s companies and a mortgage of £38,000 on Pillai’s house had been paid off by one of Chong’s companies in August 1985. He was prepared to do what Chong wanted without asking questions.
Nevertheless that cannot be the end of the matter, because Pillai could not afford to allow an obviously silly underwriting decision to remain on the file. If he did that his juniors, such as Mr Stewart, might become suspicious and his superiors might either be informed of those suspicions or might read the file for themselves at any moment of their choosing. Indeed it seems to me to be significant that, in the whole history of the CBGs, no reports had been requested until CBGs 5 and 6 were being negotiated and, even then, those CBGs appear to have been issued before the reports were received. On this occasion the file was to be in apple-pie order. The reports were requested and received before CBGs 8 and 9 were issued. It is difficult to be certain what would have happened if the Bank had either given a qualified answer to question 5 or stated in terms that bills drawn on a particular acceptor and purchased under the previous facility had not been honoured on presentation; but it seems to me that, on the balance of probabilities, Pillai and Chong together or separately would have realised that they were playing with fire and that either the CBG would not have been issued or, if issued, Chong would not have continued to invite the Bank to purchase bills for non-existent goods.”
ECGD’s case, as set out in the pleadings (see further and better particulars of paragraph 6 of the amended points of Defence) was that Mr Stewart had been induced and misled by the misrepresentations. Although Mr Hirst made some attempt to make good the case before us, in my view he did not succeed. It is quite clear that Mr Pillai was the decision maker, not Mr Stewart.
ECGB put forward a particular defence to the contractual claim under CBG 8, namely that it was a condition precedent to liability that the bills of lading should be authenticated. This involved the evidentiary requirements of Form ECG 2096 being incorporated in the CBG. The factual background for the contention is somewhat complex. Since ECGD do not need this defence and it does not have any bearing on the rest of the case, I do not propose to deal with it. The Judge expressed this conclusion at p210 under the heading ‘Authentication’. I agree with him that the requirement of Form 2096 was not incorporated into the contract by implication. But I am inclined to think that Mr Hirst is right when he submits that the buyers were ‘UK’ buyers. What is also clear is that until Mr Matthews did so in January 1988 no-one at the Bank turned their minds to the requirements of Form 2096 which had been drawn to their attention in correspondence. Had they done so, and had they checked with Lambert Brothers who appeared to be the shipping agents on the copy bills of lading, they would have discovered that these bills were forgeries. On the other hand Mr Chong, accomplished forger that he was, might well have provided other appropriate authentication. All that one can say is that it is typical of the slip-shod way in which the Bank, and Mr Herod in particular, conducted the business, that they paid no regard to the requirements of Form 2096.
The claim in contract under the SBGs
There was a period of over two years between the issue of CBGs 8 and 9 in October 1985 and the issue of the first SBG on 22 December 1987. It is necessary to set out some of the history during this period.
Eleven bills of exchange to a value of about £4 million drawn by Chong’s companies and purchased under CBG 8 had been dishonoured in 1986 (seven of these formed the subject of the claim). Although the bills were long outstanding, no claims were made and no formal notification given to ECGD (though Mr Pillai was told informally). The Bank knew that if it made claims, it would sour the Guarantee Department’s attitude to new guarantees and remove any chance of repayment to the Bank of large sums owed by Chong and his group of companies to the Bank.
Numerous Mareva injunctions had been granted against Chong’s companies. One was in respect of an alleged letter of credit fraud, Chong claiming that the Bank had agreed to issue a letter of credit; this had enabled him to defraud the Plaintiff in that case of £30,000. In another case Chong deceived the Bank by stating that the injunction had been discharged completely, when in fact it had only been discharged on the strength of an undertaking in similar terms. The Bank became technically in contempt of Court. Their solicitor told them that Chong had deliberately deceived him. Mr Herod was also aware that in a judgment the Judge rejected a defence put up by Chong as altogether incredible. A series of judgments was obtained against the Chong Group, including one for arrears of rent in respect of their offices.
On 4 September 1986 the Bank made formal demand on Chong’s companies for their entire indebtedness in the sum of £3 million. The demand was never withdrawn. By September 1987 Mr Herod accepted that Mr Chong had become insolvent, and that not just in a technical sense, for about a year. He agreed that SBG 1 was like manna from heaven to Chong in his difficulties, the proceeds of which were used by the Bank to discharge overdrafts and repay two bills purchased under the CBGs.
By September 1987 the Bank knew nothing about Chong’s business, had seen no evidence as to how payment was being made for the vast quantities of whisky and tobacco being exported under the CBGs; nor did they have any explanation as to why the companies were in financial straits while conducting apparently profitable export business.
In March 1987 Mr Herod authorised purchase of a bill of exchange drawn on Younes SARL purportedly under the CBG at a time when he knew Chong was insolvent. In fact the CBG had expired and he did so on the faith of a promise from Mr Pillai that the CBG would be increased within 7 days. The purpose of the deal was to enable Mr Chong to buy a ship. Mr Pillai’s promise was never honoured. Three months after the application he gave a spurious reason for not doing so to the effect that the application form was not correct. By that time the Bank had advanced money against the bills. The Bank never made any complaint to ECGD that Mr Pillai’s promise, which was in writing, was not honoured.
SBG 1 was issued in connection with a proposed transaction for sale of 6 turbine generators by Sloane to Texasgulf Inc. None of the transactions to which SBG 1 relates took place and the bills of exchange and other documents were forged. In contrast to the CBGs the buyers existed and were highly respectable; but the contractual documents and the bills of exchange purportedly accepted were forged.
As I have already indicated, the definition of ‘Guaranteed Instrument’ in the SBGs was ‘any accepted bill of exchange…. (i) in connection with which the Bank has taken all reasonable steps to satisfy itself as to its validity and enforceability’ in the Buyer’s country….’
The ECGD had, in its standard letter dated 22 December 1987 enclosing the guarantee, told the Bank that the action to be taken by it to establish the validity of bills of exchange or promissory notes should be along the lines agreed between the ECGD and the London Clearing Bank’s Committee (“the Committee”) in 1966 and offered to make a copy available. At this stage this offer was ignored. The ECGD also asked that the details of the action to be taken to establish the validity of the instruments be set out in the facility letter.
The Bank’s facility letter to Sloane dated 21 December 1987 did not contain the clauses recommended by the Committee. The Bank purchased the bills on or about 30 December 1987. The warranty, which was signed by Mr Chong dated 24 December 1987 apparently did not have attached to it a list of bills, as required, and was not fully and correctly completed in that the appropriate deletions had not been made. The Bills were already purportedly accepted by Texasgulf, itself a highly unusual circumstance. Mr Chong was anxious to secure payment then and there. Mr Herod knew nothing of how Chong had got into the trade of supplying major corporations with heavy machinery, and he never saw a contract with the buyers or the suppliers. He believed, that Hawker Siddeley were the suppliers in all cases but never saw any evidence of payment – a common feature of Chong’s dealings. By 13 January 1988 he appears to have become suspicious. He supplied Chong with a reference for Hawker Siddeley which he handed to Chong. But it is not clear what the purpose of this was.
Despite the requirements of the SBG, the Bank took no steps to satisfy itself as to the validity of the bills or their enforceability in the Buyer’s country. Mr Herod’s explanation was that he had an assurance from Mr Pillai that the Bills would be acceptable to the Department. The Judge did not accept this evidence; he concluded that Herod was perjuring himself.
SBG 2 was issued in connection with the purported export of mining machinery by Tempest Diesels Limited to Newmont Mining in New York. The transaction was fronted by Tempest Diesels, a company controlled by Mr Allam, originally because it was anticipated that they would make some modifications to the machinery. As the Bank was well aware, behind Tempest was Zebra, another Chong company. Tempest Diesels were a long established company and the Judge accepted that Mr Allam (who gave evidence) and Tempest were mere dupes and that they were not party to Chong’s fraud.
The facility letter issued to Tempest Diesels did not contain the clauses recommended by the Committee and did not contain mention of any steps to be taken to establish the validity or enforceability of the bills. On 17 December Mr Herod submitted an application to ECGD for SBG 2 which bore a forged signature. The Judge was unable to resolve the circumstances in which the Bank obtained this instead of the genuine one.
A meeting took place on the afternoon of 20 January at the Bank, chaired by Mr Matthews and attended by Mr Allam and Chong. During it the Bills were stamped and signed by Mr Allam as drawn and then handed to Mr Matthews together with the copy bills of lading and the warranty which had been carefully and accurately completed at the same time. Mr Matthews then went out to copy the Bills and gave Mr Allam the copy which he produced in Court.
After Mr Allam had left, Mr Matthews appears to have handed the documents, including the unaccepted bills of exchange, back to Chong. Later that afternoon, the bills were returned to the Bank, having been miraculously accepted by a North American corporation.
Mr Matthews had read the terms of the SBG. He knew he needed to verify the validity and enforceability of the Bills. He contacted Mellon Bank in London, where the Bills were accepted as payable, to be told that neither Texasgulf nor Newmont banked there. He told Mr Herod, who became very worried once he learned of the position, having already advanced in excess of £1 million under SBG 1. The 1966 correspondence was sent to the Bank at its request on 21 January.
Mr Pillai was due to call at the Bank on 22 January 1988. Mr Herod took the opportunity to try and remedy the situation. Mr Pillai signed a letter dated 22 January 1988 in these terms:
Re: Tempest Diesels Limited
Buyer: Newmont Mining Corporation USA
Thank you for providing shipping documents together with Bills of Exchange relating to this transaction which is to be financed under the specific Bank Guarantee (ECGD). These documents are acceptable and I consider them to be valid and enforceable in the UK. Credit Lyonnais Bank Nederland NV can regard the Bills of Exchange as acceptable for this transaction.
The letter was dictated by Mr Herod and typed by his secretary Mrs Lynch on EC paper which Mr Pillai produced from his brief case. He also got Mr Pillai to sign a similar letter dated 26 January in relation to SBG 1. Mr Pillai told Mr Herod that he recognised the signatures on the acceptances as being that of the buyers.
SBG 3 was issued in connection with the purported sale to Cooper Industries of Centrifugal Compressor Systems. Once again, the transaction was fictitious and the documents presented thereunder were forged. The Bank’s facility letter did not contain the clauses recommended by the Committee. The Bank took no steps to check the Bills. It merely obtained a similar letter dated 27 May 1988 from Pillai confirming that the documents were acceptable.
The warranty stated that the relevant bills had been accepted, but, inconsistently, the statement that the shipping or other documents of title had been surrendered by the Seller was deleted.
SBG 4 was also issued in connection with the purported sale of compressor systems by Westred to Cooper Industries. Again, the transaction was fictitious and the instruments were forged. No steps were taken to check the validity of the Bills, other than through Mr Pillai’s letter of 27 May. The warranty was not properly completed in that it contained no list of bills and gave the same inconsistent answers as those given above in relation to SBG 3.
In the light of these circumstances ECGD contended that the bills purchased under the SBGs were not ‘guaranteed instruments’ inter alia because the Bank had ‘not taken all reasonable steps to satisfy itself as to their validity and enforceability’ as required by clause 1(a)(i). The Bank contended that they had done so by relying on Mr Pillai’s oral representation and letter of 26 January 1988 in relation to SBG 1 and the letters of 22 January and 27 May in relation to SBG 2, 3 and 4 respectively. The Judge rejected the Bank’s contention on the basis that the oral representation had never been made and that Mr Pillai had no actual or ostensible authority to make the representation of acceptability. There is no appeal from these findings, which were sufficient to dispose of the Bank’s claims in contract under the SBGs. I have set out the history, I fear at some length, because it is or may be relevant to two aspects of the claims in tort namely the complicity of Mr Pillai in Mr Chong’s fraud and causation.
The claims in tort
In this appeal Mr Smith has put the Bank’s claim in tort in the forefront of his argument. Before the Judge the Bank’s claim was based primarily on the tort of conspiracy. In this Court Mr Smith recognised that the claim in conspiracy added nothing to the claim in deceit, because in an unlawful act conspiracy, which this was said to be, the unlawful act relied upon must be actionable at the suit of the Plaintiff (Clerk and Lindsell on Torts 17 Ed. para 23-80. Marinan v Vibart  1QB 234 and 528. Lonrho v Shell  AC 173 per Lord Diplock at p186 etc). If he could not succeed in deceit therefore he could not succeed in conspiracy.
The Judge held that Mr Pillai was not a joint tortfeasor vis-a-vis the Bank, because although he acted corruptly towards ECGD he did not have sufficient knowledge of Mr Chong’s fraud or have a common purpose with him. He made this finding both in relation to CBG 8 and the SBGs. Unfortunately the Judge does not appear to have appreciated that by the time of the SBGs the Department conceded that Mr Pillai must have known what Mr Pillai was up to and was a party to it. Mr Hirst conceded, rightly in my judgement, that by the time the SBGs were issued Mr Pillai was liable in the tort of deceit committed against the Bank (see paras 100 and 101 of the skeleton argument). His complicity is clearly demonstrated at the time that he signed the acceptability letters in January and May 1988; but in my judgement it is also demonstrated earlier.
It is still however in dispute whether Mr Pillai had the requisite knowledge and complicity in Mr Chong’s fraud at the time CBG 8 was issued in October 1985. Mr Hirst submits that this is not established and the onus is upon the Plaintiff to do so. He accepts that there is evidence that Mr Pillai had been corrupted by Mr Chong because in August 1985 one of Mr Chong’s companies redeemed a mortgage on a house belonging to Mr Pillai at 55a Fassett Road, Kingston-upon-Thames; the amount required for the redemption was £38,000, more than twice Mr Pillai’s annual salary at that time. But he submits the Judge’s conclusion expressed in the following two passages of his judgment is correct at the time of the issue of CBG 8.
At p227 of the judgment:
“It does not follow from this (the fact that he was acting corruptly) that Mr Pillai knew anything about the scale of Chong’s deceit. Pillai’s part in the scheme was to ensure that guarantees were given to the Bank. That was no more than one element in Chong’s overall scheme. There is no evidence that he knew Chong was purporting to export non-existent goods, procuring bills of exchange with forged acceptances and persuading the Bank to part with cash in return for such bills. I do not infer that he had such knowledge. Pillai was a cog in Chong’s overall fraudulent scheme.”
And at p228:
“It is very difficult to form any view of Pillai’s state of mind now that he is dead but, in my view, Mr Smith has been able to prove no more than that Pillai, as a result of Chong’s corruption of him, would not exercise the proper and requisite care of a civil servant in his position in underwriting the guarantees and would help Chong by doing whatever he or his Bank required of him without asking questions. I do not consider this sufficient for the imposition of a secondary liability in deceit.”
Although the second passage referred to the time of the SBGs, which Mr Hirst accepts cannot be supported, he submits that it is correct in relation to the earlier period.
Mr Smith submits that although these are findings of fact they are based on inference and not primary findings resulting from the Judge’s assessment of the witness Mr Pillai, whom he did not see. Since the Judge was in error with regard to the later period, his finding is flawed in relation to the earlier one. In these circumstances this Court is not inhibited from intervening to alter his finding in relation to the earlier period. There is force in this submission.
He also argued that there was considerable evidence to show Mr Pillai’s complicity at an earlier stage. Although very little of his evidence goes back as far as 1986, let alone 1985, Mr Smith submits that it shows deep complicity at least by 1987 and that the proper inference is that Mr Pillai was in the fraud from the outset. He relied on the following matters:
Only one of these matters goes back to October 1985, namely number 7. I have not found this an easy question. The evidence shows beyond doubt to my mind Mr Pillai’s complicity by 1987 and perhaps as early as mid-1986. But the pattern of a corrupt employee becoming more and more deeply involved in the fraud of his corrupter is unfortunately all too familiar. I appreciate that the evidence as to his later complicity is equally consistent with earlier complicity; it is only to be expected that more evidence of this will become apparent as time goes on. But I am not persuaded that in October 1985 at the time of CBG 8 Mr Pillai was more than a tool, albeit a corrupt one, in the hands of Mr Chong. It seems to me that his action in calling for reports on Mr Chong’s companies tends to suggest lack of complicity at this stage. He was not
to know that the Bank would provide such an anodyne report. If he was party to the fraud, he might expect, if the Bank had done what it should have, that the report would be very unfavourable and that was likely to prevent underwriting of the CBG. True it is that ECGD’s procedures required a report; but the requirement was not always observed and if Mr Pillai had knowledge of the fraud at this stage, it would have been better to issue the CBG and then think of some excuse why the report was not asked for. The onus of establishing complicity is on the Bank and I do not think it has succeeded in discharging it.
If Mr Pillai was not himself a tortfeasor in respect of CBG 8 then clearly there can be no vicarious liability on the part of ECGD in respect of it either. But the question remains whether ECGD are vicariously liable in respect of Mr Pillai’s tort in relation to the SBGs.
Mr Smith advanced five propositions in support of the liability of ECGD:
Proposition 1 is not in dispute. As to propositions 2 and 3 Mr Hirst sought to draw a distinction between what Mr Pillai did in securing the issue of the SBGs, and the assistance he gave in claiming to recognise the signatures on the bills and writing the acceptability letters. The first he submits is not sufficient to render Mr Pillai a joint tortfeasor in the tort of deceit, though he accepts as I understand it, that it would be sufficient to make him liable as a joint tortfeasor in the tort of conspiracy. The second would render him liable as a joint tortfeasor in deceit. I have some difficulty in understanding why in the first case Mr Pillai is liable in conspiracy, but not in deceit, since it is established that in unlawful act conspiracy, the unlawful act i.e. deceit, has to be actionable at the suit of the Plaintiff.
Be that as it may, it seems to me to be well established that a person who acts with another to commit a tort in furtherance of a common design will be liable as a joint tortfeasor. It is not enough that he merely facilitates the commission of the tort unless his assistance is given in pursuance and furtherance of the common design.
In the Koursk  p140 Scrutton LJ said at p155:
“Certain classes of persons seem clearly to be “joint tortfeasors”: The agent who commits a tort within the scope of his employment for his principal, and the principal; the servant who commits a tort in the course of his employment, and his master; two persons who agree on common action, in the course of, and to further which, one of them commits a tort. These seem clearly joint tortfeasors; there is one tort committed by one of them on behalf of, or in concert with another.”
And at p156 he said:
“I am of the opinion that the definition in Clerk and Lindsell on Torts, 7th ed., p59, is much nearer the correct view : “Persons are said to be joint tortfeasors when their respective shares in the commission of the tort are done in furtherance of a common design”….”but mere similarity of design on the part of independent actors, causing independent damage, is not enough; there must be concerted action to a common end.”
In Brooke v Bool  2KB 578 A and B set out together to investigate the source of a gas leak which was B’s direct concern alone. A had come with him to help. Because B was too old to carry out a particular task, A carried it out instead. The means of investigation was ill-advised and an explosion took place. A was plainly liable. The Divisional Court held that B was liable too as a joint tortfeasor engaged in a common venture with A.
In Unilever plc v Gillette (UK) Ltd  RPC 583, the question was whether the parent company of the Defendant was a party to an alleged infringement of the Plaintiff’s patent so as to make it liable as a joint tortfeasor. Mustill LJ at p603, after citing the Koursk stated the common law rule that two persons were joint tortfeasors “where the two were concerned in a joint act done in pursuance of a common purpose”.
After reviewing the patent cases and the speech of Lord Templeman in C.B.S. Songs v Amstrad Consumer Electronics  AC1013, Mustill LJ said at p609 that the relevant question is whether “(a) there was a common design between Boston and G.U.K. to do acts which, if the patent is upheld, amounted to infringements, and (b) Boston had acted in furtherance of that design. I use the words “common design” because they are readily to hand, but there are other expressions in the cases, such as “concerted action” or “agreed on common action” which will serve just as well.”
Mr Hirst submitted that in issuing the SBGs Mr Pillai was merely facilitating the fraud by Mr Chong in the sense of making it possible. There was nothing unlawful vis-a-vis the Bank in issuing them. They could be used perfectly lawfully, it was up to Chong whether he chose to use them for the purpose of fraud. I do not think this is correct. Each SBG was for a specific transaction which was known to Mr Pillai. And the latter’s actions in relation to the acceptability letters and the matters referred in some of the numbered paragraphs above show to my mind that there was a common design between him and Mr Chong and that he was acting in furtherance of it by issuing the SBGs, without which the fraud could not have succeeded.
Mr Smith also submits that liability as a joint tortfeasor will arise in the same circumstances as the criminal liability of an aider and abettor. There is no authority to this effect. But there is support from the text book writings. Thus Professor Glanville Williams in Joint Torts and Contributory Negligence at p11 writes:
“The law relating to parties to a tort has not been so well worked out as that relating to parties to a crime. In criminal law a principal in the second degree shares the full guilt of the actual perpetrator of the crime, and is defined as anyone (other than the principal in the first degree) who, being a conspirator, is present at the time of the crime, or who (whether a conspirator or not) assists in its commission. It is submitted that a similar definition can be used in tort to indicate a joint tortfeasor. Every principal in the second degree to a tort is necessarily a joint tortfeasor, though of course the converse is not true.”
Professor Fleming in the Law of Torts 8th Edition at p256 writes
“While the requisite degree of participation has not been precisely defined in modern decisions, there is a cogent support both in principle and ancient authority for the suggestion that it may well correspond with the description attached by the criminal law to principals in the first and second degree. This would include, besides the actual perpetrator, anyone who “aids and abets”, whether or not he actively intervenes. Knowingly assisting, encouraging or merely being present as a conspirator at the commission of the wrong would suffice.”
And Mr Atiyah in Vicarious Liability in the Law of Torts at p301 writes:
“It cannot be asserted with any confidence whether any other qualifications should be made to the basic principle formulated above that the defendant must have been a party to the very tort committed. But if the analogy of the criminal law can be prayed in aid once again, a person might be held liable for authorising, assisting or procuring a tort of a particular kind even though he does not know the particular party against whom the tort may be committed or the detailed method which the actual tortfeasor proposes to adopt. Indeed, in the criminal law it has been held that “one man may abet another by helping to set the stage before the victim has been found”. In the case from which this dictum is taken a person who assisted another to open a bank account knowing that he intended to use the account to present forged cheques, was held guilty of aiding and abetting the actual perpetrator. There seems no reason to doubt that in such circumstances the party liable as an abettor could be sued in tort by the defrauded party for the loss suffered by him.”
I have had the advantage of reading Hobhouse LJ’s judgment and particularly his penetrating analysis under the heading ‘Secondary liability in tort’. I agree with him that a person may be criminally liable as an aider and abettor without being necessarily liable in tort as a joint tortfeasor with the principal. But an aider and abettor may also be a conspirator if he has agreed with others in the commission of the crime. In civil law the aider and abettor will be liable if what he had done is pursuant to and in furtherance of the common design to commit the tort.
Thus it seems to me that in the case of Thambiah v R  AC 37, the Appellant would probably have been liable as a joint tortfeasor with the actual forger of the cheque on the basis that what he did in opening the bank account in a false name and maintaining it was pursuant to and in furtherance of the common design that in due course the fraud would be practised upon the Bank by the actual fraudster.
So in this case it seems to me that there is abundant evidence that what Mr Pillai did in authorising the issue of SBGs 1,2,3 and 4 was pursuant to and in the furtherance of a common design with Mr Chong to deceive the Bank, so as to render him liable both in conspiracy to deceive and as a joint tortfeasor in the tort of deceit. It is I think permissible to draw the inference of a common design from all the evidence in the case, including that relating to the acceptability letters and the purported identification of the signatures of the acceptors. The issue of the SBGs was an essential part of the fraud, because without them the Bank would not have purchased the bills of exchange.
Accordingly in my view Mr Smith’s propositions 2 and 3 (amended as I would prefer to do by substitution of the words in brackets for the words ‘as part of’), are made out.
I also accept Mr Smith’s further proposition 4 namely that the deceit caused the Bank loss because it bought valueless forgeries. It follows that if Mr Pillai is a joint tortfeasor in the tort of deceit, he would be liable to the Bank to make good these losses. Equally there is no dispute that in underwriting the guarantees, Mr Pillai was acting in the course of employment. Where however I do not agree with Mr Smith is that these propositions are sufficient to make ECGD vicariously liable to the Bank for Mr Pillai’s tort. The question can be posed in this way: Where A becomes liable to B as a joint tortfeasor with C in the tort of deceit practised by C on B on the basis that A and C have a common design to defraud B and A renders assistance to C pursuant to and in furtherance of the common design, does D, A’s employer become vicariously liable to B, simply because the act of assistance, which is not itself the deceit, is in the course of A’s employment with D?
Mr Smith was unable to cite any authority to support the proposition that D is liable. And in principle it seems to me that he is not. A is vicariously liable for C’s deceit, because in effect he is a conspirator and is therefore liable for the actions of the other conspirators, he is therefore in the same position as if he had himself deceived B. D is only liable to B if the tort, which consists of the deceit, was in the course of A’s employment, that is to say within his actual or ostensible authority. If Mr Pillai had in fact personally deceived the Bank by putting forward the forged documents as genuine, it is clear that this would not have been within his actual or ostensible authority. The situation would be the same as when Mr Pillai made the representations about the acceptability of the bills. Mr Smith does not seek to contend that ECGD are vicariously liable for this, because he does not challenge the Judge’s finding that this was not within Mr Pillai’s authority, actual or ostensible. There was nothing unlawful in issuing the SBGs, they did not deceive the Bank. The act of issuing them rendered Mr Pillai liable as a tortfeasor in Mr Chong’s deceit because it was done pursuant and in furtherance of a common design between him and Mr Chong to deceive and defraud the Bank. In my judgement support for this view is to be found in the judgment of Diplock LJ in Morris v C.W. Martin and Sons Ltd  1QB 716 at p737:
“The mere fact that his employment by the defendants gave him the opportunity to steal it would not suffice. The crucial distinction between Lloyd v Grace, Smith and Co. and Ruben v Great Fingall Consolidated is that in the latter case the dishonest servant was neither actually nor ostensibly employed to warrant the genuineness of certificates for shares in the company which employed him. His fraudulent conduct was facilitated by the access which he had to the company’s seal and documents in the course of his employment for another’s purpose; but the fraud itself which was the only tort giving rise to a civil liability to the plaintiffs was not committed in the course of doing that class of acts which the company had put the servant in its place to do.”
Thus the tort giving rise to the civil liability to the Plaintiff is the deceit. That was not practised in the course of Mr Pillai’s employment. The nearest case to the present is the Ocean Frost Armagas Ltd v Mundogas S.A.  1AC 717. The facts were these:
The Plaintiffs were formed to purchase a ship from the defendants on the basis that the vessel was to be chartered back to the defendants for a period of three years at a minimum hire of U.S. $350,000 a month. Before the plaintiffs were incorporated, J., a broker, carried out negotiations on their behalf with M., who was the defendants’ vice-president (transportation) and chartering manager. J. was to acquire a substantial interest in the plaintiffs and he and M. completed a transaction by which M., accepting a bribe of part of J.’s interest in the plaintiffs, met the plaintiffs’ representatives in Denmark and told them that he had authority to complete an agreement for the sale of the ship with a three year charter back to the defendants. The plaintiffs were told that for internal reasons the defendants needed a charterparty for a period of 12 months only. Thus documents purporting to be a three year and a 12 month charterparty came into existence. J. never sent the three year charterparty to the defendants. The defendants, acting in the belief that they had sold the vessel and had entered into a 12 month charterparty, redelivered the vessel at the end of the year. The plaintiffs issued a writ claiming damages for breach of the charterparty. M. admitted that he had made and signed the charterparty for a three year period without the knowledge or authority of the defendants but alleged that J. was aware of that and had offered him “a piece of the ship.
It should be noted that it was within the scope of M’s authority to sell the ship, but not to enter into a three year charterparty. Lord Keith of Kinkel, with whose speech the other members of the House agreed made it clear that the rules relating to vicarious liability for the dishonest acts of a servant differ from those relating to acts of negligence or trespass. See p780 A.C. After reviewing the authorities, including Morris v Martin and Lloyd v Grace, Smith and Co.  AC 716, Lord Keith said at p782H:
“At the end of the day the question is whether the circumstances under which a servant has made the fraudulent misrepresentation which has caused loss to an innocent party contracting with him are such as to make it just for the employer to bear the loss. Such circumstances exist where the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer’s business. They do not exist where such belief, although it is present, has been brought about through misguided reliance on the servant himself, when the servant is not authorised to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorised to do, and when the employer has done nothing to represent that he is authorised to do it. In the present case, Mr Magelssen was not authorised to enter into the three year charterparty, to do so was not within the usual authority of an employee holding his position, and Armagas knew it, and Mundogas had done nothing to represent that he was authorised to do so. It was contended for Armagas that concluding the contract for the sale of the vessel was within Mr Magelssen’s actual authority, and that inducing the sale by falsely representing that he had authority to enter into the charterparty amounted to no more than an improper method of performing what he was employed to do, such as in other contexts was sufficient to attract vicarious liability. But the sale of a ship backed by a three year charterparty is a transaction of a wholly different character from a straightforward sale, even if the charterparty is not to be regarded as a transaction separate and distinct from the sale, and Mr Jensen and Mr Dannesboe knew that Mr Magelssen had no authority to enter into a transaction of that character on his own responsibility.”
In that case it did not avail the Plaintiffs that M had authority to sell the vessel, which was a necessary step that set the scene for the fraud, the deceit consisted of the representation that the three year charterparty was a valid contract that M was authorised to make it. So here it does not avail the Bank that Mr Pillai was authorised to issue the SBGs, which set the scene for Mr Chong’s deceit. In my judgement ECGD was not vicariously liable for Mr Pillai’s tort. In this respect I differ from the view expressed obiter by the Judge at p229.
In these circumstances I do not find it necessary to deal with Mr Hirst’s separate argument on causation.
I would dismiss the appeal.
LORD JUSTICE HOBHOUSE: On this appeal from the judgment of Longmore J sitting in the Commercial Court in favour of the Defendants, the Export Credits Guarantee Department, the Plaintiffs, called at the material times Credit Lyonnais Bank Nederland NV, assert causes of action in contract and in tort. The contract claims are made under a contract of guarantee dated 23rd October 1985 issued by the Department in favour of the Bank. The primary point on this Guarantee (‘CBG 8’) is a point of construction. The claims in tort are more wide ranging. They raise questions of fact, vicarious liability and causation.
Like Stuart-Smith LJ, I consider that the Judge’s decision on the question of construction was correct and that the claims in contract cannot succeed. As regards the claims in tort I also agree with Stuart-Smith LJ that the Judge’s decision in favour of the Department should in the result, but not in its reasoning, be upheld. The problem for the Bank has been to find a basis for making the Department vicariously liable for the torts of Mr Pillai.
The Construction Issue
The issue is whether the Guarantee covers bills of exchange which have been accepted by a buyer or which merely purport to have been accepted by a buyer. Any question of the construction of a written contract has to be approached by the Court first putting itself in the position of the parties to the contract. The law on this topic derives from the decision of House of Lords in Hvalfangerselskapet Polaris v Unilever  39 Com Cas 1, restated in Reardon Smith v Hansen-Tangen  1 WLR 989 and most recently by Lord Hoffmann in ICS v West Bromwich Building Society , 19th June 1997. The purpose is to enable the Court to attribute the appropriate objective meaning to the words used by the parties in the document.
This Guarantee formed part of the scheme then operated by the Department on behalf of the Secretary of State under the authority of the Export Guarantees and Overseas Investment Act 1978. It was primarily a scheme to assist British exporters by providing them with insurance against the risk of not being paid by their buyer whether through the default of the buyer or through other causes such as restrictions on the transfer of currency, cancellation of valid import licences, etc. Also to assist exporters, the scheme provided for the Department to furnish guarantees to banks so as to encourage them to finance such exports at favourable interest rates.
The primary document in the operation of the scheme is the insurance policy (confusingly called a “guarantee”) issued by the Department to the exporter. The exporter is the insured. The subject matter of the policy is the performance of the buyer’s contractual obligation to the insured to pay the price of the exported goods sold by the insured to the buyer. The perils insured against cover risks of the insolvency of the buyer and general political and economic risks arising outside the United Kingdom including supervening legal risks and war risks. They do not cover breach of contract by the buyer unless that buyer be a foreign government authority. Fundamental to the insurance policy is the existence of an export contract between the insured and a buyer which creates an obligation on the part of the buyer to pay the insured.
Guarantee CBG 8 was issued by the Department as the result of a joint application by the Bank and the ‘exporter’, in this instance two of Mr Chong’s companies, Sycamore Holdings Ltd and Westred Ltd. The Guarantee recites that the companies are insured under a policy issued by the Department. By clause 2 of the guarantee the Department
“hereby guarantees payment to the Bank of ….. the face value of any Guaranteed Instrument which has been duly presented for payment or presentation of which for payment has been prevented by circumstances beyond the control of the Bank or its correspondents and which remains unpaid six months after the due date of payment thereof against surrender to the insurer, if so required, of the relevant Guaranteed Instrument duly endorsed.”
“Guaranteed Instrument” is defined as meaning “any sterling bill of exchange drawn by the exporter and accepted by a buyer ….”.
It is clear in my judgment, both from the language used and, if necessary, from the contractual context that the document guarantees acceptances. The drawing of a bill of exchange imposes no obligation upon the drawee to accept or pay the bill. That obligation, if it exists, must derive from some other contract. Where a bill is payable so many days after sight it contemplates that it will be accepted as does any bill which allows a period of credit (as did all the bills and promissory notes in the present case). If a bill when presented to the drawee for acceptance is not accepted, then the bill has been dishonoured by non-acceptance. Once a bill has been accepted the acceptor comes under an obligation to pay the bill at its maturity and if he fails to do so the bill has been dishonoured by non-payment.
The subject matter of the Guarantee is the acceptance and the guaranteed obligation is the acceptor’s obligation to pay the bill at maturity. It is not a guarantee of any obligation of the exporter. This is further confirmed by the requirement that the Bank (the beneficiary of the Guarantee) shall have purchased the accepted bill without recourse. The liability that is guaranteed is the liability of the buyer created by his acceptance of the bill. This is the meaning of the language which the parties have used. It is also the meaning which is consistent with the scheme of the Guarantee and of the insurance policy to which it refers and is ancillary.
During the course of argument, submissions were also made about the legal effect in this regard of the SBGs issued to the Bank some two years later. These did not form any part of the circumstances surrounding the issue of CBG 8 to the Bank, who at that time had not seen an SBG and were not aware of the terms on which SBGs were issued. The form used by the Department for SBGs does contemplate that there might be problems with the validity or enforcibility of foreign acceptances under any applicable foreign law; in so far as the obligations accepted by the Department in relation to the SBGs may have gone further than this, it would, in my judgment, have been as a result of the collateral agreement evidenced by the correspondence with the London Clearing Banks Committee referred to in the Department’s offer letter. The position under the SBGs is irrelevant to the construction of CBG 8.
The bills of exchange upon which the Bank seeks to rely in support of their claims under CBG 8 were never accepted. The relevant drawees were fictitious (save possibly for Delmonico Overseas, where it seems that Mr Chong happened to have used the name of an actual company). The forms 3377 purporting to certify that the named drawees were approved by the Department were forgeries. The drawees were not entities who had bought anything from Sycamore Holdings or Westred. None of them was “a buyer”. Nor were there ever any acceptances of the bills. The signatures which they bore were forged: they were not the signatures of the drawees. In the words of s.24 of the Bills of Exchange Act 1882 the forged signatures were “wholly inoperative” and no right to enforce payment could be acquired through or under such signatures. These bills of exchange were not accepted bills of exchange whether by a buyer or anyone else. The liability to pay the bills of exchange never arose. No obligation of any acceptor to pay the bills of exchange ever arose. There was no liability which was guaranteed by this Guarantee – no primary liability to which the liability of the Department was secondary.
For the reasons given by Stuart Smith LJ, I agree that First Sport Ltd v Barclays Bank  1 WLR 1229 does not assist the argument of the Bank. The question of construction in each case turns upon the words used in the relevant document and the relevant surrounding circumstances.
The Bank’s contractual claim under CBG 8 accordingly fails.
The Other Defences
Various other defences were also raised by the Department to the Bank’s contractual claim under CBG 8. Of these it is only necessary to mention two.
Misrepresentation: There were undoubtedly serious and inexcusable misrepresentations in the answers which the Bank gave to the questionnaire sent to them by Mr Stewart, Mr Pillai’s subordinate. That these misrepresentations were material to the issue of the Guarantee likewise cannot be disputed. But the Department were in difficulty upon the question of inducement. Inducement can be readily inferred from the making of a material misrepresentation. But in the present case the Department did not allege that Mr Pillai was influenced by the misrepresentations. The Department solely relied upon the fact that Mr Stewart believed the representations to be true. However Mr Stewart was in a subordinate role. It was not his decision whether the Guarantee should be issued. That decision was for all practical purposes taken by Mr Pillai. On the pleaded case of the Department, the Department’s case on inducement failed. The decision of the Judge in favour of the Department on this point confused causative considerations with inducement. It may well be true that Mr Pillai would not have authorized the issue of the guarantee without there having been placed upon the file some reference from the Bank but that is not the same as saying that he was induced to issue the guarantee by any misrepresentation. He may have known that what was said was untrue: he may not have cared whether it was true or not. However, as previously stated, it was not part of the case of the Department that the misrepresentations had any effect on the mind of Mr Pillai. Since Mr Pillai was the relevant person in the organisation of the Department, this omission is fatal to this defence.
Authentication: The other defence to which it is necessary to refer was the failure of the Bank to authenticate the bills of lading. In my judgment the Judge was wrong to dismiss this point in the way that he did. On the face of the documents tendered to the Bank the persons to whom the goods were being exported were persons with addresses and carrying on business in the United Kingdom. Accordingly, on the documentation provided to the Bank by the Department, the copy bills of lading should have been authenticated by the person stated to have issued them, that is to say the ship’s agents, Lambert Brothers. The only question was whether this requirement was ever incorporated as a contractual term of the Guarantee. It was not referred to in the Guarantee itself and could only be said to have incorporated indirectly through the reference to exporter’s warranty. It is not necessary to resolve this question. It is not decisive of the claims under the Guarantee. These claims fail in any event because of the construction point and the absence of any acceptances. The sole remaining relevance of the non-authentication point is to the question of causation in relation to the corresponding tort claim. For that purpose it is not necessary to decide whether the requirement for authentication was contractually incorporated. Its force as a factor in any question of causation is as potent. The Bank did not operate the recognized and accepted scheme for checking and confirming that they were dealing with a genuine export transaction and receiving a copy of a genuine bill of lading. If they had carried out the simple check called for they would have been told that the bills of lading were forgeries and the exports fictitious.
The Bank suffered losses when it paid money to Mr Chong’s companies having purchased from them forged acceptances or promissory notes backed by fraudulent documents purporting to cover export transactions including forged copy bills of lading. Many of these losses were recouped through funds provided directly or indirectly by Mr Chong and his companies (contrary, it must be stressed, to the whole tenor of the scheme and the Guarantees). The cause of the losses were frauds practised upon the Bank principally by Mr Chong. The frauds consisted of the presentation of forged or fraudulent documents. They amounted to the tort of deceit. In respect of the sums paid under the transactions to which SBGs 2, 3 and 4 related, there were also express frauds by Mr Pillai himself. He provided Mr Herod with the letters of “acceptability” for these SBGs and, for SBG 3 and 4, he himself forwarded the fraudulent documents to the Bank. The letter of acceptability that he provided after the event for SBG 1 was not causally relevant to the losses which the Bank suffered in connection with that Guarantee although it was yet another confirmation of the fraudulent involvement of Mr Pillai at that stage.
It is also clear that by 1987 at the latest Mr Pillai was fully involved in Mr Chong’s frauds upon the Bank as a co-conspirator. The facts proved by the documentary evidence are not explicable on any other basis. Mr Pillai was actively participating in the frauds being practised upon the Bank by Mr Chong in connection with SBGs 1 to 4. He was a joint tortfeasor with Mr Chong. The relevant torts were the tort of deceit and the tort of civil conspiracy to injure the Bank. Mr Pillai, like Mr Chong, was civilly liable to the Bank.
There was a factual issue at the trial whether the Bank had proved that Mr Pillai was at the time of the issue of CBG 8 in 1985 a party to a conspiracy with Mr Chong to defraud the Bank or to practise a deceit upon the Bank. There was no doubt, as the Judge found, that by this time Mr Chong had successfully corrupted Mr Pillai by bribing him. That Mr Pillai was a party to acts adverse to the interests of the Department was established. The issue was whether the corruption of Mr Pillai had gone further and that he had by that date become a party to the practising of frauds upon the Bank and a party to a conspiracy to defraud the Bank. It was for the Bank to prove, on the balance of probabilities, that this was so.
I am not satisfied that they discharged this burden of proof. There certainly is a very strong suspicion that by this time Mr Pillai was already fully cognisant of and involved in Mr Chong’s frauds on the Bank. But in my judgment the evidence does not support more than a suspicion and that the relevant fraudulent involvement of Mr Pillai at this stage was not in fact proved. There is no clear evidence to support the inference that Mr Pillai was necessarily a party to or privy to any fraud upon the Bank at this stage. His helpful conduct towards Mr Chong was explicable by his corruption and was as such only adverse to the interests of his employers, the Department. Most of the acts upon which Mr Smith QC on behalf of the Bank relied before us were acts which were helpful to Mr Chong and adverse to the Department without involving any fraud upon the Bank, for example, the extensions of the period for making claims, the proposal of additional contracts favourable to Mr Chong’s companies. There was no evidence to connect Mr Pillai with any of the forged forms 3377; indeed any such allegation was expressly disavowed by the Bank.
There was evidence which supported the inference that in 1985 Mr Pillai was not fully aware of what Mr Chong had been doing. I refer to the fact that it was Mr Pillai who insisted that reports should be obtained from the Bank on Mr Chong’s companies. If Mr Pillai knew of Mr Chong’s frauds on the Bank, this was a very high risk strategy. Mr Pillai was not to know that the Bank would not give truthful and accurate answers to the questions which they were going to be asked. Truthful answers would probably have brought to an end the support of the Department for Mr Chong unless Mr Pillai could find some way of suppressing the relevant documents, an unlikely hypothesis since the documents would be, and were, sent to Mr Stewart not Mr Pillai.
Accordingly, in my judgment, the involvement of Mr Pillai in the frauds of Mr Chong upon the Bank at the time of the issue of CBG 8 was not proved and this part of the tort claim failed on the facts. However, if a different view were to be preferred, this part of the tort claim would have failed also on the ground that the Department is not vicariously liable for any participation by Mr Pillai in the fraud of Mr Chong.
The starting point for the consideration of this question is that, in relation to the losses arising from the transactions purportedly covered by SBG 1, 2, 3 and 4, Mr Pillai was a joint tortfeasor with Mr Chong and was civilly liable in the torts of deceit and conspiracy to the Bank for the losses that the Bank suffered at this time. The question is whether the Department is vicariously liable for the torts of Mr Pillai.
Mr Smith summarized the Bank’s case in five submissions:
“1. Chong deceived the Bank inducing it to buy bills with forged acceptances by making (express or implied) representations that (a) the acceptances on the bills were genuine and (b) they related to genuine export transactions.
The drafting of these submissions reflected certain difficulties which Mr Smith had to face in presenting the Bank’s case. He had to accept that none of the acts of express fraud on the part of Mr Pillai were within the scope of his employment or within any actual or ostensible authority which he had from the Department. Thus, Mr Smith accepted the finding of the Judge that the writing of the acceptability letters was not within the actual or ostensible authority of Mr Pillai. The same would apply to the delivery by Mr Pillai, on behalf of Mr Chong’s companies, to the Bank of the documents tendered under SBGs 3 and 4. Mr Smith also accepted that the Bank would not succeed in showing that a conspiracy to defraud was within the scope of the employment of Mr Pillai by the Department. In exceptional circumstances, possibly such as those involving a trades union (see Giblan v National Amalgamated Labourers Union  2 KB 600), it may be possible for there to be a vicarious liability for acts of conspiracy but this is not such a case. Conspiring with third parties to injure banks formed no part of anything which Mr Pillai was employed to do nor was he ever held out to the Bank as having any authority to do any such thing.
Mr Smith therefore had to found his case upon the acts of deceit practised by Mr Chong for which he submitted Mr Pillai was jointly liable. He could not, and did not, submit before us that the Department was vicariously liable for those express acts of deceit. Mr Smith submitted that the liability of Mr Pillai was or, more accurately, included a secondary liability of assisting Mr Chong’s deceits (submission 2) which assistance included doing acts which assisted Mr Chong and which fell within the scope of Mr Pillai’s employment, namely the authorizing of the issue of the Bank guarantees (submission 5). Mr Smith thus combined two implicit propositions: the first was that there was a tort of knowing assistance in the commission of a tort by another and the second was that there was a vicarious liability for this assistance even though there might not be a vicarious liability for the primary act itself. Mr Hirst QC on behalf of the Department challenged both aspects of this submission.
In my judgment Mr Hirst’s argument was correct. There is no tort of knowing assistance. As I will explain the liability in tort of a defendant for the act of another depends, in this context, upon the defendant’s participation in or authorization of that act. It is essentially an agency principle which makes the defendant liable for the relevant act. The analogy drawn by Mr Smith with the criminal liability of aiders and abettors was not correct. Similarly, if vicarious liability is to be established, it must be based upon a vicarious liability for the tortious act for which the employee is liable. The employee is tortiously liable because he was a party to the deceit or the deceit is attributed to him. The vicarious liability of his employer can only arise if the relevant act of deceit was within the scope of the employment of the employee.
In my judgment the case of the Bank on vicarious liability fails. The legal propositions upon which it is based are not the law. The participation and acts which gave rise to the tortious liability of Mr Pillai were not within the scope of the employment of Mr Pillai by the Department and do not give rise to a vicarious liability of the Department for Mr Pillai’s torts.
“Secondary Liability” in Tort
The phrase secondary liability is one which is used in a number of senses. It is necessary to make some distinctions. Since the argument of Mr Smith drew heavily upon an analogy with criminal law, including the citation of such cases as Thambiah v R  AC 37, it is convenient to illustrate these distinctions by reference to concepts used in criminal law.
For historical reasons criminal lawyers conventionally categorize as a secondary party every person other than the actual direct physical actor, i.e. the person who physically performs the actus reus , unless that actor be wholly innocent of any knowledge of the criminality of the relevant act, e.g. the postman who delivers the fraudulent letter. (See Smith and Hogan Criminal Law (8th edition) pp.128 and following.) The secondary parties are now all described as “accessories”. (Before the abolition of the distinction between felonies and misdemeanours, a defendant could in respect of a felony be charged as a principal in the first degree or the second degree or as an accessory before the fact or after the fact.) But the only thing which accessories have in common is that they have some relationship with the criminality of another who is physically more closely connected with the performance of the primary criminal act. It is still necessary to identify the basis and character of their liability. To simply refer to a ‘secondary’ liability is not sufficiently exact.
The quotation of the words used in s.8 of the Aiders and Abettors Act 1861 “whoever shall aid, abet, counsel or procure the commission of any misdemeanour”, without recognising that they may (like the principal in the second degree and the accessory before the fact) cover more than one basis of liability and the importance in some situations of distinguishing between those bases of liability, contributes to this lack of exactitude. Similarly, the criminal law recognises that one or more persons can commit a crime through the instrumentality of another: qui facit per alium, facit per se .
“It is a principle of law that if several persons act together in pursuance of a common intent, every act in furtherance of such intent by each of them is, in law, done by all.” ( R v Macklin (1838) 168 ER 1136)
Thus persons who participate in a criminal joint enterprise are, through the attribution to them of the actus reus, in reality joint principals with the primary actor. However since the primary actor has himself committed a criminal offence, there is a tendency to treat him alone as the principal and all the others as mere accessories. This in turn gives rise to a strongly held academic view, supported by doctrinal arguments probably derived from the concept of complicity, that their liability can only be based upon ‘aiding and abetting’. (Since preparing this judgment I have seen a newly published article at 113 LQR 453 by Professor Sir John Smith QC, a leading proponent of this view, in which coins the phrase “parasitic accessory liability” so as make it possible to rationalise the joint enterprise cases on the basis of aiding and abetting.) All this adds to the potential for confusion between different bases of liability, as does the terminology of the criminal law which calls the agent the ‘principal’ and the principal the ‘accessory’.
For the purposes of the distinctions which it is presently necessary to make, it suffices to identify three categories of liability. They are not intended to be, nor are they, exhaustive. Furthermore, in any given factual situation, the same conduct of a defendant may be capable, as I will illustrate, of being put legally into all or any of the three categories.
(1) Criminal conduct which is not dependant upon the commission of the principal crime: These are sometimes called “inchoate” offences. Thus it is a separate criminal offence to solicit or incite another to commit a crime or to conspire with another to commit a crime. It does not matter whether the solicitation or incitement leads to the other person committing the crime, the relevant defendant is criminally liable just the same. ( ex parte Morgan  2 QB 58) The same applies to the crime of conspiracy. A defendant can be charged with conspiracy whether or not the conspiracy has been carried through to the commission of the intended crime. In this category therefore the “secondary” party is liable as a principal because he has committed a free-standing criminal offence which is, on the proper use of terminology, not secondary to the substantive offence.
(2) Aiding another in the commission of a crime: Here again the defendant is only liable for his own conduct but its criminality is dependant upon the criminality of another. It is a criminal offence knowingly to assist another to commit a crime. The clearest statement of this principle is to be found in the judgment of Devlin J in NCB v Gamble  1 QB 11 at pp.20-23. The archetypical example is a shopkeeper who sells a weapon to a criminal knowing that it will be used to commit a crime. The shopkeeper has no interest in nor does he join in the commission of the crime. This type of criminal liability comes under the heading of ‘aiding and abetting’ but not necessarily ‘counselling and procuring’. It is an accessory liability in the sense that the commission of the subordinate offence is dependant upon the commission of the primary offence. It follows that essential ingredients of the proof of the offence of aiding a primary offence are that the primary offence be identified and be proved to have been committed and that the defendant be proved to have knowingly aided its commission. (As regards assistance given after the commission the primary offence, the law is now contained in s.4 of the Criminal Law Act 1967.) Thus the defendant who is convicted of being an aider is convicted because of his own conduct (aiding) and his own state of mind (knowing that he was aiding the commission of the primary offence) but his criminal liability is dependant upon the commission of that offence. It is not an agency principle nor is it the same as inciting another to commit a crime.
(3) Agency – responsibility for the act of the primary actor: This depends upon a different principle which focuses upon the actual criminal act done by the primary actor who is usually the ‘principal’ offender but may indeed not be criminally liable at all. The clearest example of the application of this principle is R v Cogan  QB 217 where a husband was held liable for having raped his wife by procuring another man to have intercourse with her against her will although the other man believed at the time that she was consenting: See in particular the judgment of the Court delivered by Lawton LJ at pp.222-3 and the approval of this judgment and the overruling of R v Richards  1 QB 776 in R v Howe  AC 417 especially at 457-8. It involves a concept of agency. Where the primary actor is liable as a principal offender, the concept is one of participation or partnership, in criminal law normally referred to as a ‘joint enterprise’, between the defendant and the principal offender which leads to the conclusion that the act was authorized by the defendant or within the scope of the implicit authority given by the defendant to the principal offender by reason of their participation together in the joint enterprise. Once the doing of the relevant act has been categorized as an act for which the defendant is responsible then his criminal liability will depend upon his state of mind at the relevant time. The correct understanding of this category is particularly important where the offence committed by the principal offender may vary depending upon his actual state of mind at the time he did the act. For example, in homicide the principal may have committed murder or manslaughter (or, as in Cogan, the primary actor may be wholly innocent of any criminal intent). But the “secondary” party, having been held responsible for the relevant act will be convicted of murder or manslaughter or acquitted depending upon his own state of mind at the material time. Thus the primary actor, the principal offender, may be liable for manslaughter but the other party to the joint enterprise, the ‘secondary’ party, be liable for murder ( R v Howe sup), and vice versa ( R v Stewart and Schofield  1 CAR 441). The distinction between this basis of liability and aiding and abetting is expressly made in the decisions of appellate courts and causes no problem of principle once the concept of agency is recognised. Thus, Sir Robin Cooke in Chan Wing-Sui v R  AC at 175 contrasts the principle of aiding and abetting with the “wider principle whereby a secondary party is criminally liable for acts by the primary offender of a type which the former foresees but does not necessarily intend”. The distinction is an important one for the proper understanding of the law of so called ‘secondary’ liability, both in the criminal law and in the civil law.
As mentioned earlier, a given defendant may be liable to be convicted in respect of the same incident on any or all of the above three bases. A person who drives the getaway car for the bank robbers or keeps watch for them outside will have committed the offence of conspiracy to rob, will have aided and abetted the robbery and will have participated in a joint enterprise to rob with the intent to rob. The fact that in the ordinary course a criminal trial may not have to trouble about the distinction between these categories does not mean that the distinctions do not exist. In criminal law, the potential for criminal liability exists under all three heads. The question in the present case is whether in civil law there is a personal civil liability for conduct which only comes under the second head or its equivalent (aiding) without also coming under the first (e.g. conspiracy or incitement) or the third (agency). As will be appreciated, the argument of Mr Smith turns upon an alleged civil liability under the second head because he accepts that he cannot establish vicarious liability of the Department for acts of Mr Pillai coming under the first or third heads.
Mr Smith has been able to find academic support for his argument. Thus Professor Atiyah says in his work on Vicarious Liability in the Law of Torts 1967 at p.195:
“Just as in the criminal law relating to misdemeanours any person who ‘aids or abets’ the commission of the offence is guilty as a secondary party, so it is clear that in the law of torts any one who assists the commission of a tort is liable as a secondary party.”
Professor Fleming in the 8th edition of his Law of Torts at p.156 appears to equiparate the civil and the criminal law relating to the liability of ‘secondary’ parties. A closer reading of these authors however suggests that they may be contemplating something closer to the first or third category of liability than the second. Professor Glanville Williams in his work Joint Torts and Contributory Negligence , 1951, pp.9 e.s. under the heading “Concerted action” is referring to the third category and a defendant who joins in the commission of the tort. The article by Mr Sales,  CLJ 491, quoted by Longmore J, treats the question as an open one (p.507).
When one turns to the authorities, they show that the law is that knowing assistance is not enough to found tortious liability. The leading authority is the speech of Lord Templeman in CBS Songs v Amstrad  1 AC 1013. A review of the authorities is also to be found in the judgment of Mustill LJ in Unilever v Gillette  RPC 583. The effect of these authorities was summarised by Aldous J in PLG Research v Ardon International  FSR 197 at p.238-9, a patent infringement action in which the personal liability of the director of the infringing company had to be considered; he said:
“I believe it is clear that a director will not be liable unless his involvement would be such as to render him liable as a joint tortfeasor if the company had not existed. For example, the law distinguishes between facilitating and procuring a tort. A person who only facilitates a tort is not liable as a joint tortfeasor whereas a person who procures the tort is liable. (See CBS Songs v Amstrad  RPC 567 and B E Lavender v Witten Industrial Diamonds  FSR 9). What amounts to facilitating tort will vary in case to case, but as Mellish LJ said in Townsend v Hawarth (1879) 48 LJ Ch 770 at 773:
‘Selling materials for the purpose of infringing a patent to the man who is going to infringe it even though the party who sells it knows that he is going to infringe it and indemnifies him, does not by itself make the person who so sells an infringer. He must be party with the man who so infringes and actually infringe’.”
These are cases which arise out of the law of intellectual property but the principles applied are drawn from the general law of tort. Infringement of a patent or copyright is a tort.
In the last century, in Cargill v Bower (1879) 10 Ch D 502 at 513, Fry J considering the personal liability of a director as a joint tortfeasor with a fellow director in the tort of deceit for the fraud of the fellow director, said:
“To what extent are agents liable for the frauds of their co-agents committed in respect of acts which they know that those co-agents are about to perform? I conceive the general law to be this, that the persons responsible for a fraud are of two classes. First, the actual perpetrators of the fraud, the authors of it, the agents who commit it, the parties to it; those who concur in it, who either do something to produce the fraudulent result, or abstain from doing something which they are under an obligation to the deceived person to do in order to prevent the fraud. Secondly, the principal for whom an agent in the performance of his duties as agent commits the fraud is also responsible. But, as a general rule, I think that one agent is not responsible for the acts of another agent, unless he does something by which he makes himself a principal in the fraud.”
In The Koursk  P 140 at p.155 e.s., Scrutton LJ said:
“Certain classes of persons seem clearly to be joint tortfeasors: the agent who commits a tort within the scope of his employment or his principal, and the principal; the servant who commits a tort in the course of his employment, and his master; two persons who are agreed on common action, in the course of and to further which one of them commits a tort.”
‘I am of opinion that the definition in Clerk and Lindsell on Torts 7th edition p.59 is much nearer the correct view:
Persons are said to be joint tortfeasors when their respective shares in the commission of the tort are done in furtherance of a common design … but mere similarity of design on the part of independent actors, causing independent damage is not enough; there must be concerted action to a common end’.”
See also Serjeant LJ at p.159 and Banks LJ at p.151-2. None of these citations support the existence of a tortious liability as an aider coming within the second category. The decisions in Townsend v Haworth ( sup) and Dunlop v Moseley  1 Ch 612, both infringement cases, are to a like effect although some of the language used might support an analogy with the criminal law.
The law was reviewed by the House of Lords in CBS Songs v Amstrad  1 AC 1013. In that case the plaintiffs claimed in tort an injunction to restrain the defendants from selling recording equipment which would facilitate infringements of the plaintiffs’ copyrights. Lord Templeman gave the leading speech with which the other members of the House agreed. It was necessary for him to consider what conduct would suffice to amount to the commission of a tort. As will be seen from the report, the arguments advanced by counsel covered “authorisation”, “accessories and joint tortfeasors”, and “incitement” (both civil and criminal). As regards civil liability based upon authorization of the tortious act Lord Templeman at p.1054 approved the statement Whitford J:
“Any ordinary person would, I think, assume that an authorisation can only come from somebody having or purporting to have authority and that an act is not authorised by somebody who merely enables or possibly assists or even encourages another to do that act, but does not purport to have any authority which he can grant to justify the doing of the act.”
As regards liability as joint tortfeasors, Lord Templeman adopted the test approved by Scrutton LJ in The Koursk  P at 156:
“Persons are said to be joint tortfeasors when their respective shares in the commission of the tort are done in furtherance of a common design.”
Lord Templeman also cited the same statement of Mellish LJ from Townsend v Haworth as I have already quoted above per Aldous J. Thus, Lord Templeman was accepting the argument of counsel for the Defendants that (p.1034):
“The acts in question in these proceedings are not acts of infringement and cannot be converted into such acts by characterizing them as the acts of an “accessory before the event”. Even if (which is denied) the defendants could be said to fit the description of an “accessory before the event” in the eyes of the criminal law, that is not a criterion by reference to which civil liability for the tortious acts of others may be fastened upon them.”
Lord Templeman went on to consider the allegation of a tort of incitement. In Lumley v Gye (1853) 2 E and B 216 a court had recognized that “he who procures a wrong is a joint wrongdoer and may be sued either alone or jointly with the agent in the appropriate action for the wrong complained of”. Lord Templeman referred to this authority and to what Buckley LJ had said in Lavender v Witten Industrial Diamonds  FSR 59 at p.66 where he identified the potential tort as being that of procuring infringement. Lord Templeman at p.1058 said:
“My Lords, I accept that a defendant who procures a breach of copyright is liable jointly and severally with the infringer for the damages suffered by the plaintiff as a result of the infringement. The defendant is a joint infringer: he intends and procures and shares a common design that infringement shall take place. A defendant may procure an infringement by inducement, incitement, or persuasion.”
He adopted the distinction drawn by Buckley LJ that “facilitating the doing of an act is obviously different from procuring the doing of the act”.
The Court of Appeal revisited these questions and these authorities in Unilever v Gillette  RPC 583 which again concerned the infringement of a patent and the question whether a parent company was a joint tortfeasor with its infringing subsidiary. Mustill LJ delivered the leading judgment with which the other members of the Court agreed. He referred to The Koursk and the liability of joint tortfeasors where “the two were concerned in a joint act done in pursuance of a common purpose”. He recognized that Townsend v Haworth decided “that a sale of an article capable of innocent use with knowledge that it would or might be utilized in infringement does not by that fact alone make the vendor an infringer” and that Dunlop v Moseley held that “the sale of articles which could be used for infringing or non-infringing purposes but which would probably be used and were intended to be used for the former was not itself an infringement by the vendor”. Similarly he adopted what had been said by Buckley LJ in the Lavender case:
“To support such a claim the plaintiffs would clearly have to plead the circumstances which made the defendants participants in the infringement or which constituted the inducement.”
“It might no doubt be argued that a vendor of some article to a purchaser whom he knows is going to use it an infringing manner is ‘aiding’ the infringement but the authorities to which I have referred establish that aid consisting of merely selling the article to a potential infringer does not amount to an infringement and of itself could not in my judgment be tortious.”
Thus, Mustill LJ concluded that it was necessary to establish that the “secondary” party had indirectly infringed either by procuring the infringement or his participation in a common design. He amplified what he had in mind at p.609:
“I use the words common design because they are readily to hand but there are other expressions in the cases, such as ‘concerted action’ or ‘agreed on common action’ which will serve just as well. The words are not to be construed as if they form part of a statute. They all convey the same idea. The idea does not, as it seems to me, call for any finding that the secondary party has explicitly mapped out a plan with the primary offender. Their tacit agreement will be sufficient. Nor, as it seems to me, is there any need for any common design to infringe. It is enough if the parties combine to secure the doing of acts which in the event prove to be infringements.”
The overall effect of these cases is clear. It is only conduct which comes into the first or the third of the categories I have set out above which constitute the commission of a tort. The criminal law for obvious policy reasons goes further than the civil law. Acts which knowingly facilitate the commission of a crime amount to the crime of aiding and abetting but they do not amount to a tort or make the aider liable as a joint tortfeasor.
Mr Smith also relied upon the case Brooke v Bool  2 KB 578 which is also referred to in the judgment of Mustill LJ. It concerned the joint liability in the tort of negligence of two men who had gone out together to look for a gas leak adopting a manifestly dangerous method of doing so. It was a clear case of joint enterprise coming within my third category. This and agency were the basis of the decision finding the defendant liable although it had been the other man who was actually holding the naked flame which caused the explosion. We were also referred, in general terms, to the equitable rules governing those who knowingly assist in breaches of trust and their equitable liability for the consequences of such breaches. ( Baden v Societe Generale  1 WLR 509) I did not however find this citation to be of assistance in the present context; it proceeded upon different principles. In so far as it depended upon the doing of “an act which is part of the fraudulent and dishonest design” ( ib at p.575), it suggests that the basis of liability is akin to my third category rather than my second.
Accordingly, in my judgment there is no second category in the law of tort. Mere assistance, even knowing assistance, does not suffice to make the ‘secondary’ party jointly liable as a joint tortfeasor with the primary party. What he does must go further. He must have conspired with the primary party or procured or induced his commission of the tort (my first category); or he must have joined in the common design pursuant to which the tort was committed (my third category).
The case of the Bank on the secondary liability of Mr Pillai therefore fails. Mr Pillai was liable as a joint tortfeasor with Mr Chong. But this liability did not arise from his mere acts of assistance such as authorising the issue of the guarantees. It arose from his being party to a conspiracy with Mr Chong to defraud the Bank and his participation in the acts of fraud done in furtherance of that common design. They were in effect partners. It follows that the first leg of the argument of Mr Smith has not been made out.
Vicarious Liability for Assistance
The argument of Mr Smith fails under this head as well. He elides vicarious liability for the acts which are alleged to have constituted assistance (the authorisation of the issue of the guarantees with vicarious liability for the fraudulent acts themselves. This is contrary to principle.
The principles governing vicarious liability for fraud have to be and are drawn more narrowly than for other torts. Fraud is not so easily attributed to an employer; the employee’s knowledge is not to be treated as the employer’s knowledge. Thus in Belmont Finance v Williams  1 Ch 250 at 261 Buckley LJ said:
“…. indeed it is a well recognized exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.
So in my opinion the plaintiff company should not be regarded as party to the conspiracy on the ground of lack of necessary guilty knowledge.”
But there is more direct authority. In Morris v Martin  1 QB 716 which concerned, among other questions, the vicarious liability of a master for a theft committed by his servant, the Court specifically distinguished between the situation where the employer has given the employee the apparent authority to commit the tort and where the employment has simply provided the opportunity to the servant to commit the tort. At p.737 Diplock LJ said:
“The mere fact that his employment by the defendants gave him the opportunity to steal would not suffice. The crucial distinction between Lloyd v Grace Smith  AC 716 and Ruben v Great Fingall Consolidated  AC 439 is that in the latter case the dishonest servant was neither actually nor ostensibly employed to warrant the genuineness of certificates for shares in the company which employed him. His fraudulent conduct was facilitated by the access which he had to the company’s seal and documents in the course of his employment for another purpose; but the fraud itself which was the only tort giving rise to a civil liability to the plaintiffs was not committed in the course of doing that class of acts which the company had put the servant in its place to do.”
Similarly at p.727 Lord Denning MR contrasted the apparent authority of a servant which can result in a liability of his employer ( Lloyd v Grace Smith ) and a servant taking the opportunity afforded by his service to steal or defraud or another for his own benefit which does not make the master liable to the person who has been defrauded ( Ruben v Great Fingall Consolidated ).
Morris v Martin and the distinction which it made were adopted by the House of Lords in Armagas v Mundogas  1 AC 717. The relevant criterion was ostensible authority to do the relevant act. The existence of authority to do other acts closely related to the fraudulent act did not suffice. I do not need to add anything to what has already been said about this authority by Stuart-Smith LJ. It is fatal to the Plaintiffs’ claims in tort in the present action. There was no vicarious liability of the Department for the acts of Mr Pillai as a joint tortfeasor with Mr Chong in defrauding the Bank.
It is unnecessary to express any concluded view about this issue. The Judge declined to find that there was any bad faith or complicity of Mr Herod or any other employee of the Bank in the fraud and there has been no challenge to that part of his judgment. However, the Department still has a strong case that the conduct of Mr Herod and the Bank was reckless and that the Bank chose to pay money to Mr Chong’s companies without regard to the ECGD scheme under which they were purporting to operate. Their apparently systematic disregard of the essential features of that scheme including its obviously precautionary features might be capable of supporting an inference sufficient to destroy the causal connection between their losses and the conduct of Mr Pillai for which it is alleged that the Department should be vicariously liable. However the tort claims fail for the reasons which I have already given.
The Bank’s claims in contract and in tort fail and this appeal should be dismissed.
LORD JUSTICE THORPE: I have had the advantage of reading in draft the judgments of my lords. I agree with their conclusion and with their reasoning.
On the facts, I like my lord, Lord Justice Stuart-Smith, found difficulty in determining whether the court should conclude that Mr Pillai had the requisite knowledge and complicity in Mr Chong’s fraud as early as October 1985. It is difficult enough to determine the extent of complicity and responsibility where the court has the opportunity to see and hear both tortfeasors thoroughly tested in the witness box. But here one was dead and the other had disappeared. There is the fact that in August 1985 Mr Chong had redeemed Mr Pillai’s mortgage in the sum of £38,000. But the payment alone is not proof that it was paid as a bribe. If not essential it would at least be reassuring to have some knowledge of the surrounding circumstances before reaching a conclusion. Then there is the fact that on 30th September 1985 Mr Pillai sent a note to his subordinate, Mr Stewart, requesting him to obtain from the Bank the standard general report on the exporting companies. If the first fact points towards corruption, the second points the other way. For if Mr Pillai and Mr Chong were acting in concert a request for a report might jeopardise the issue of the CBG. As Lord Justice Stuart-Smith reasons the safer course would seem to have been to issue without a report and to justify by reference to past practice. But in assessing the motives and actions of fraudsters it may not be safe to make assumptions in conformity with the rationality of honest men. To neglect to make a request would carry the risk of weakening Mr Pillai’s position vis a vis his employer and thus his long term utility in aiding future frauds. To call for the report carried the risk of losing the CBG. But it also offered the gain of strengthening Mr Pillai’s position vis a vis his employer. He could demonstrate that he had taken the required step to protect his employer in its dealing with Mr Chong. If Mr Pillai had assurance from Mr Chong that he would take care of the request and manipulate the Bank into a favourable response then the fraudsters had the prospect of the gain without the risk. I make these observations to establish my conviction that it is dangerous to draw confident inferences from equivocal facts when assessing the motives and intentions of fraudsters. In the end I am convinced that there is simply insufficient material to justify the inference that Mr Pillai had the requisite complicity in Mr Chong’s fraud in October 1985. It is perfectly possible that he had. The extent of the evidence of hand in glove fraud at a later date is remarkable. But the onus is on the Bank and in my judgment it is only not discharged for the earlier relevant date.
Order: Appeal dismissed with costs; application for
leave to appeal to the House of Lords refused.