Smith v Lloyds TSB Group Plc (Harvey Jones Ltd v Woolwich Plc)

A cheque or bankers draft materially altered by replacing the true payee is, subject to the exceptions in section 64(1) of the Bills of Exchange Act 1882, avoided and becomes worthless as a negotiable instrument. The legal fiction that a valid cheque represents its face value for conversion damages does not apply after material alteration. The true owner therefore cannot recover the face value in conversion. A paying bank cannot debit its customer for payment on the invalid instrument, but a replacement draft issued as a matter of practice does not validate the altered draft. The invalidity cannot be avoided by estoppel.

Two conjoined appeals concerned cheques or bankers drafts whose true payees’ names had been fraudulently replaced before collection and payment. In the Lloyds action, the joint liquidators of ILG Travel Limited claimed the face value from Lloyds as collecting bank. Blofeld J had ruled on a preliminary issue that only nominal damages were recoverable. In the Woolwich action, Harvey Jones Ltd claimed the face value of a bankers draft from Woolwich as paying bank. His Honour Judge Hallgarten QC had awarded the full face value. The common issue was whether section 64 of the Bills of Exchange Act 1882 made the altered instrument worthless for conversion purposes.

Pill LJ delivered the leading judgment. Potter LJ agreed and added concurring reasoning. Sir Murray Stuart-Smith agreed. The court unanimously dismissed the appeal in the Lloyds action and allowed the appeal in the Woolwich action.

1. Effect of material alteration. Section 64(1) of the Bills of Exchange Act 1882 uses avoided in a substantive sense. Subject to its qualifications, a materially altered cheque or draft is no longer a cheque or draft on which contractual rights can be enforced. It is a worthless piece of paper.
2. Conversion damages. The legal fiction, explained in Lloyds Bank v The Chartered Bank of India, Australia and China [1929] 1 KB 40 and Morison v London County and Westminster Bank [1914] 3 KB 356, equates the value of a valid cheque with the money represented by it. That fiction cannot apply where material alteration has already destroyed the instrument’s value. No party can recover the face value in conversion.
3. Allocation of risk. In the case of a cheque, the paying bank bears the risk because it cannot debit its customer. In the case of a bankers draft, the customer’s account has already been debited and the customer assumes the relevant risk. The possibility that the bank might issue a replacement draft does not preserve the altered draft’s value.
4. Slingsby. The court followed the section 64 reasoning in Slingsby v District Bank Ltd [1932] 1 KB 544. The apparent criticism of Finlay J’s reasoning arose from a misreading of his judgment; Scrutton LJ’s later treatment of section 64 was consistent with it.
5. Estoppel and lost instruments. Presenting the instrument through ordinary banking arrangements did not represent that it was valid. Potter LJ further held that sections 69 and 70 of the 1882 Act, concerning lost bills, did not make the already altered draft valuable for conversion purposes.

The final order was dismissal of the Smith and Hayward appeal with costs, and allowance of the Harvey Jones appeal with costs in both courts.

• Court of Appeal (Civil Division): On 27 July 2000, dismissed the Smith and Hayward appeal and allowed the Harvey Jones appeal.
• Queens Bench Division: Blofeld J, on 29 June 1999, held on a preliminary issue that only nominal damages were recoverable against Lloyds.
• Central London County Court: His Honour Judge Hallgarten QC, on 8 June 1999, awarded Harvey Jones Ltd the full face value against Woolwich.