Banco de Portugal v Waterlow & Sons Ltd

When a breach of contract places the innocent party in an emergency, the law requires a reasonable response, not a perfect one. Loss caused by reasonable remedial measures remains attributable to the breach, although a cheaper course can later be suggested.

A bank of issue compelled by a breach to issue valid notes without receiving value suffers an immediate loss measured by their face value, translated at the applicable exchange rate. This remains so where the currency is inconvertible. Unissued notes are merely paper, but issued notes confer purchasing power and impose an enforceable obligation.

Recoveries from other wrongdoers must prevent double recovery. They need not be apportioned against a defendant’s liability where the combined recovery does not exceed the claimant’s total loss.

Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 concerned damages for an admitted breach of a banknote-printing contract. Waterlow printed and delivered 580,000 unauthorised duplicates of the Bank’s 500-escudo notes to a fraudster. Large numbers entered circulation and were indistinguishable from authorised notes.

To protect Portugal’s currency and its own credit, the Bank withdrew the entire affected issue and exchanged valid notes for every authorised or spurious note presented during the announced exchange period. Wright J awarded £569,421. A majority of the Court of Appeal reduced the award to £300,000; Scrutton LJ considered that only £8,922 was recoverable.

The consolidated appeals concerned whether the Bank’s response was reasonable, whether its loss comprised the face value of the valid notes or merely their printing cost, and how £488,430 recovered from the fraudsters should affect the award.

1. Disposition. By a majority of three to two, the House allowed the Bank’s appeal and dismissed Waterlow’s appeal. The Lord Chancellor, Lord Atkin and Lord Macmillan held that judgment should be entered for the Bank for £610,392.

2. Reasonable remedial action. All five Law Lords accepted that the Bank acted reasonably in immediately withdrawing the compromised issue and honouring authorised and spurious notes alike until 26 December 1925. Under the rule in Hadley v Baxendale (1854) 9 Exch. 341, this response and its resulting loss arose naturally from the breach. The Bank was responsible for maintaining confidence in the national currency. It was not required to sacrifice innocent holders or risk another panic merely because means of distinguishing some forged notes later became available. Exchanges after the announced closing date could not be charged to Waterlow.

3. Measure of loss. Per the Lord Chancellor, Lord Atkin and Lord Macmillan, the proper measure was the face value of the valid notes issued without consideration, converted into sterling at the agreed contemporary exchange rate. Once issued, a note became legal tender and purchasing power. It could acquire commodities, gold or securities, discharge the Bank’s debts, or be tendered to the Bank in satisfaction of debts owed to it. Its inconvertibility affected its exchange value but did not reduce the Bank’s loss to the cost of paper and printing. An unissued note would have had only its physical replacement cost, but issue transformed its legal and economic character.

4. Collateral recovery. Per the Lord Chancellor, Lord Atkin and Lord Macmillan, the £488,430 recovered or expected from the fraudsters was deductible from the Bank’s total loss. Waterlow received credit only to the extent necessary to prevent recovery beyond that total loss. This left a net loss of £610,392, which remained within Waterlow’s liability.

5. Dissent. Lord Warrington of Clyffe and Lord Russell of Killowen considered that the Bank had proved no loss beyond printing costs. In their view, an inconvertible note imposed an obligation which the Bank could satisfy by issuing replacement currency. They would therefore have allowed Waterlow’s appeal and dismissed the Bank’s appeal.

1. House of Lords: In Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, the Bank’s appeal was allowed and Waterlow’s appeal was dismissed by a majority of three to two. The Court of Appeal’s award was set aside and judgment was entered for £610,392.

2. Court of Appeal: Greer and Slesser LJJ reduced Wright J’s award from £569,421 to £300,000. Scrutton LJ dissented on the measure of damages and considered that only £8,922 was recoverable. The Bank’s cross-appeal seeking a higher award was dismissed.

3. High Court: Wright J entered judgment for the Bank for £569,421 with costs.