In Grosvenor Casinos Limited v National Bank of Abu Dhabi [2008] EWHC 511 (Comm) it was held that the Uniform Rules for Collection 522 did not create privity of contract between a principal and collecting bank.
In 2001, the Claimant company ("Grosvenor") obtained judgment in default against an individual ("R") from Ajman in the United Arab Emirates ("UAE") in relation to two dishonoured cheques which R had presented to Grosvenor following a gambling spree at one of their London casinos. The cheques in question were blank house cheques of the casino drawn on R's account with the Ajman branch of the National Bank of Abu Dhabi ("NBAD"). However, Grosvenor's judgment against R was not satisfied due to enforcement difficulties in the UAE.
As Grosvenor were not able to enforce their judgment against R, they commenced proceedings against NBAD for deceit and breach of contract. The claim in deceit was brought on the basis of an alleged fraudulent oral misrepresentation by the customer service manager at the Ajman branch of NBAD who dealt with R's affairs ("S") to an employee ("P") at Grosvenor's bank in London ("Natwest") that the first cheque was "paid". The claim for breach of contract concerned an alleged contract that was made directly between Grosvenor and NBAD by virtue of the relevant cheque collection being undertaken pursuant to the Uniform Rules for Collection 522 (the "URC").
As regards the claim in deceit, Grosvenor contended that in confirming that the first cheque was "paid", S must have known and intended that a "paid" answer would be understood (which it was by P) as confirmation that sufficient funds were available to honour the cheque, that steps were being taken to remit the funds and that the recipient of the advice could safely regard the cheque as "paid" and expect the funds to be remitted in due course. However, the true position was that there were insufficient sums in R's account at the time that the "paid" answer was given to honour the cheque and there was no evidence that any other facility was available from which sufficient funds could be transferred straightaway. Grosvenor contended that they had relied on the "paid" answer by, amongst other things, allowing R to continue to cash cheques at the casino.
NBAD's case in relation to the deceit allegations was that S's "paid" answer meant no more than that the cheque was in order and that he was confident that funds would be made available in the near future by or on behalf of R to honour the cheque.
As regards the claim for breach of contract, Grosvenor argued that the effect of the collection of the first cheque being undertaken pursuant to the URC was that a direct contractual relationship came into existence between Grosvenor and NBAD under which NBAD owed Grosvenor a duty to act in good faith and to exercise reasonable care. NBAD submitted that no such contract arose.
The Court held that Grosvenor's claim in deceit failed on the basis of its finding that S had not acted dishonestly in giving the "paid" answer in relation to the first cheque. The Court considered that the more likely explanation for S's "paid" answers (of which there had been several) was a mismatch between S and P as to what a "paid" answer meant, as opposed to fraud on his part. S had no motive for making a fraudulent statement to P (with whom he had had no previous dealings at that stage) and English was not his first language. Furthermore, the concept of a verbal "paid" answer was not a term of art in international banking practice and there may have been confusion or misunderstanding on S's part as regards the collection instruction letter from Natwest to NBAD, which was ambiguous. The Court found that the most likely explanation of the "paid" answers given by S was that he was stating that the cheque was received and in order and that he was confident that R would transfer the funds to the account to enable the value to be remitted. Accordingly, it was not necessary for the Court to consider whether the other elements of the tort of deceit were made out.
The Court held that Grosvenor's claim for breach of contract also failed. The common law position was clear as a matter of English law: there is no privity of contract between the payee/customer of the remitting bank and the collecting bank, just as a sub-agent is not in privity of contract with the principal. The Court held that the common law position was not displaced by the provisions of the URC or the collection letter and that there was therefore no direct contractual relationship between Grosvenor and NBAD. The URC was intended to govern existing contractual relationships, not create such relationships where they do not otherwise exist.
Practical implications
This case will provide comfort to any bank which faces a breach of contract claim under English law brought by a principal for alleged breaches of the URC. The case also highlights the issues that can arise when dealing with banks in different jurisdictions and the importance of ensuring that misunderstandings do not occur as a result of different languages and practices.
This article was written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
