Lloyds Bank Plc v Independent Insurance Co Ltd

A bank’s actual authority to make a customer’s payment is construed objectively from the customer’s instruction and the facts known to both parties. A mistaken belief that incoming funds have cleared does not remove authority unless receipt of cleared funds was a condition of the mandate. Where an authorised payment discharges a debt owed by the customer to the payee, the payee has a defence to restitution. The defence rests on good consideration and may also reflect change of position. Ostensible authority is a separate estoppel question. It does not itself make the debt discharged as between the bank and payee.

WF Insurance Services Ltd owed premium money to Independent Insurance and instructed its new bank, Lloyds, to transfer the money by CHAPS. Lloyds later made the transfer before an incoming cheque had cleared, because its employees mistakenly believed that cleared funds were available. The cheque was dishonoured and Lloyds sought restitution from Independent.

The Central London County Court held that Lloyds had acted outside its authority and gave judgment for the bank. Independent appealed, arguing that Lloyds had actual or ostensible authority and that the payment discharged WF’s debt. Lloyds maintained that, even if authorised, the payment remained recoverable in restitution.

Appeal allowed unanimously. The judgment below was set aside and the money was ordered to be returned to Independent.

1. Actual authority. The scope of a bank’s mandate depends on the customer’s instructions, construed objectively in the context of facts known to the bank and customer. A distinction must be drawn between the bank’s authority to pay and its obligation to do so. The instruction to pay as soon as possible was not qualified by a condition that the incoming cheques first clear. Lloyds’ statement that it could not pay until clearance qualified the bank’s obligation, not WF’s authority. The transfer was therefore within the bank’s actual authority. Lord Justice Thorpe agreed with this reasoning. Lord Justice Peter Gibson also agreed.
2. Ostensible authority. The issue did not arise once actual authority was established. Lord Justice Waller nevertheless observed that apparent authority was based on estoppel. A payment was not equivalent to a disposition of property, and a representation that the bank was authorised would not by itself make the debt discharged as between the bank and payee. Representation, reliance and detriment would be required. If Independent were precluded from recovering against WF and thereby changed its position, that could defeat Lloyds’ restitutionary claim. These observations were obiter; Lord Justice Gibson preferred not to express a view on this issue.
3. Restitution. The court upheld and applied the principle in Barclays Bank Limited v Simms [1980] QB 679. The relevant part of that formulation was not obiter because it was fundamental to the reasoning. An authorised payment made under mistake which discharges an existing debt gives the payee a defence based on good consideration. Repayment could also expose the payee to renewed proceedings by the debtor, amounting to change of position. The court could not assume the availability of restitution in order to determine whether the debt had been discharged. Pritchard v Hitchcock (1843) 6 Man & G 151 did not support restitution of an authorised payment in these circumstances.
4. Lord Justice Gibson additionally explained that the payee was not unjustly enriched where it was entitled to receive the money on another ground, and that bona fide purchase and change of position were distinct and coexisting defences.

The respondent was ordered to pay the costs of the appeal and the first-instance proceedings. Leave to appeal was refused, and interest was ordered on the returned money.

• Court of Appeal: Appeal by Independent Insurance allowed. The lower judgment was set aside, with consequential orders for return of the money, interest and costs.
• Central London County Court: On 24 November 1997, His Honour Judge Hallgarten QC held that Lloyds had made the payment outside its authority and entered judgment for Lloyds in the sum of £107,387.90 plus interest.