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Case Summary
| Citation | Standard Chartered Bank v. Pakistan National Shipping Corporation [2003] 1 All ER 173 (HL) |
| Keywords | director, deceit, documents, law, company |
| Facts | Mr. Mehra, managing director of Oakprime Ltd, had a letter of credit from Incombank, confirmed by SCB, for a sale to Vietranscimex.The credit required shipment by 25th October 1993, which Oakprime missed. Mr. Mehra and shipping entities (Pakistan National Shipping Corporation (PNSC) agreed to backdate bills of lading to 25th October 1993, though the goods weren’t shipped until November 8, 1993. Oakprime, under Mr. Mehra’s letter, presented these documents to SCB on 9th November 1993, with an omitted document and discrepancies. The omitted document was presented a few days later and certain other documents which had shown discrepancies in the terms of the credit were resubmitted after the final date for negotiation of the credit had passed. SCB, knowing the false presentation date, sought reimbursement from Incombank, which rejected the documents for other discrepancies. SCB sued PNSC, shipping agents, Oakprime, and Mr. Mehra for deceit.Justice Cresswell held all liable for damages. Mr. Mehra appealed, arguing he acted on Oakprime’s behalf, not personally. |
| Issues | Whether the conduct of SCB would at common law be a defence to a claim for deceit? Whether Mr. Mehra was liable for his deceit? |
| Contentions | |
| Law Points | The House of Lords stated that if a false representation is made and relied upon, it is irrelevant if the claimant could have discovered the truth with diligence. The House of Lord clarified that one cannot avoid liability for fraud by claiming to act on behalf of someone else.Mr. Mehra was not sued for the company’s wrongdoing but for his own actions, which constituted fraud. Being a director did not automatically make Mr. Mehra liable; it was his fraudulent conduct that led to his liability. Mr. Mehra personally presented the false documents to Standard Chartered Bank, intending to deceive them. His actions were attributed to Oakprime because he acted on its behalf. While a director can orchestrate deceitful schemes and submit false documents to a bank, they are not personally liable if these actions are deemed to be on behalf of the company. Directors can be held liable for the company’s tort only if they ordered or facilitated actions that rendered the company liable. |
| Judgement | The House of Lords’ ruling emphasizes that Mr. Mehra’s liability stems from his fraudulent actions rather than solely from his position as a director. |
| Ratio Decidendi & Case Authority |
Full Case Details
LORD HOFFMANN – 1. Mr Mehra was the managing director of Oakprime Ltd, the beneficiary under a letter of credit which had been issued by Incombank, a Vietnamese bank, and confirmed by Standard Chartered Bank, London (SCB). The credit was issued in connection with a cif sale of Iranian bitumen by Oakprime to Vietranscimex, a Vietnamese organisation. A condition of the credit was “Shipment must be effected not later than 25 October 1993”. The last date for negotiation was 10 November 1993.
2. Loading was delayed and Oakprime was unable to ship the goods before 25 October 1993. But the shipping agents and shipowners (Pakistan National Shipping Corporation (PNSC)) agreed with Mr Mehra to issue bills of lading dated 25 October 1993 and did so on 8 November 1993, before the goods had been shipped. On 9 November 1993 Oakprime presented the bill of lading and other documents to SCB under cover of a letter signed by Mr Mehra stating that (with one omission) the documents were all those required by the credit. This statement was false to the knowledge of Mr Mehra because he had himself arranged for the backdating of the bill of lading. The false statement was made to obtain payment under the letter of credit and it is agreed that if there had been no bill of lading or SCB had known that it was falsely dated, payment would not have been made. The omitted document was presented a few days later and certain other documents which had shown discrepancies from the terms of the credit were resubmitted after the final date for negotiation of the credit had passed. Notwithstanding that SCB knew that these documents had been presented late, it decided to waive late presentation. It authorised payment of US $ 1,155,772.77 on 15 November 1993.
3. SCB then sought reimbursement from Incombank. It sent a standard form letter that included a statement that the documents had been presented before the expiry date. This statement was known by a relevant employee of SCB to be false. Incombank, although unaware of both Mr Mehra’s false dating of the bill of lading and SCB’s false dating of the presentation of the documents, rejected the documents on account of other discrepancies which SCB had not noticed. Despite further requests, SCB was unable to obtain reimbursement.
4. SCB then sued the shipowners (PNSC), the shipping agents, Oakprime and Mr Mehra for deceit. They had all joined in issuing a false bill of lading intending it to be used to obtain payment from SCB under the credit. Cresswell J held that they were all liable for damages to be assessed: [1998] 1 Lloyd’s Rep 684.
5. PNSC appealed on the ground that the loss suffered by SCB had been partly the result of its own “fault” within the meaning of section 1(1) of the Law Reform (Contributory Negligence) Act 1945 and that its damages should therefore be reduced to such extent as the court thought just and equitable. Sir Anthony Evans would have accepted this argument and reduced the damages by 25%. But the majority of the court (Aldous and Ward LJJ) ([2001] QB 167) held that SCB’s conduct was not “fault” as defined in the Act because it was not at common law a defence to an action in deceit: see the definition in section 4 of the Act.
6. Mr Mehra appealed on the ground that he had made the fraudulent representation on behalf of Oakprime and not personally. The court unanimously upheld this ground of appeal. It ordered SCB to pay Mr Mehra’s costs before that court and three-quarters of his costs at trial: [2000] 1 Lloyd’s Rep 218.
7. PNSC appealed to your Lordships’ House against the decision that the damages could not be reduced and SCB appealed against the decision that Mr Mehra was not personally liable. Shortly before the hearing, PNSC agreed to pay SCB US$1.7m in full and final settlement of its claims to damages, interest and costs. There was no apportionment between these heads of claim and the settlement agreement expressly preserved SCB’s claims against other parties. Your Lordships have allowed the petition of PNSC for leave to withdraw its appeal.
8. At the commencement of the hearing, Mr Cherryman QC submitted on behalf of Mr Mehra that the settlement gave SCB the whole of any damages to which it could be entitled against PNSC and Mr Mehra as joint tortfeasors. It would therefore be an abuse of the process of the court to pursue the appeal against Mr Mehra. The appeal should be stayed. He did not however propose that any change should be made to the Court of Appeal’s order for costs in favour of Mr Mehra. Your Lordships refused the application for a stay on the ground that, quite apart from the question of whether the settlement moneys discharged the whole of SCB’s claim, it was entitled to proceed so as to have the order for costs set aside and to obtain an order in its favour.
9. Before your Lordships Mr Mehra argued that not only was he not liable at all, for the reasons given by the Court of Appeal, but that if he was liable, the damages should be reduced on account of the contributory negligence of SCB.
10. My Lords, I shall consider first the defence of contributory negligence. The relevant provisions of the 1945 Act are sections 1(1) and the definition of “fault” in section 4:
“1(1)Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage …
4. …’fault’ means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to a defence of contributory negligence.”
11. In my opinion, the definition of “fault” is divided into two limbs, one of which is applicable to defendants and the other to plaintiffs. In the case of a defendant, fault means “negligence, breach of statutory duty or other act or omission” which gives rise to a liability in tort. In the case of a plaintiff, it means “negligence, breach of statutory duty or other act or omission” which gives rise (at common law) to a defence of contributory negligence. The authorities in support of this construction are discussed by Lord Hope of Craighead in Reeves v. Commissioner of Police of the Metropolis [(2000) 1 AC 360, 382]. It was also the view of Professor Glanville Williams in Joint Torts and Contributory Negligence 318 (1951).
12. It follows that conduct by a plaintiff cannot be “fault” within the meaning of the Act unless it gives rise to a defence of contributory negligence at common law. This appears to me in accordance with the purpose of the Act, which was to relieve plaintiffs whose actions would previously have failed and not to reduce the damages which previously would have been awarded against defendants. Section 1(1) makes this clear when it says that “a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but [instead] the damages recoverable in respect thereof shall be reduced…”
13. The question is therefore whether at common law SCB’s conduct would be a defence to its claim for deceit. Sir Anthony Evans thought that it would. He said that although the conduct of SCB in making a false statement about when the documents had been presented was intentional or reckless, the House of Lords had decided in Reeves case that an intentional act could give rise to a defence of “contributory negligence” at common law and therefore count as “fault” for the purpose of the Act. I am not sure that it was necessary to rely upon Reeves for this purpose, because the Act requires fault in relation to the damage which has been suffered. That damage was SCB’s loss of the money it paid Oakprime. In Reeves, the plaintiff’s husband had intended to cause the damage he suffered. He intended to kill himself. But SCB did not intend to lose its money. It would be more accurate to say that it was careless in making payment against documents which, as it knew or ought to have known, did not comply with the terms of the credit, on the assumption that it could successfully conceal these matters from Incombank. In respect of the loss suffered, SCB was in my opinion negligent.
14. Be that as it may, the real question is whether the conduct of SCB would at common law be a defence to a claim in deceit. Sir Anthony Evans said that the only rule supported by the authorities was that if someone makes a false representation which was intended to be relied upon and the other party relies upon it, it is no answer to a claim for rescission or damages that the claimant could with reasonable diligence have discovered that the representation was untrue. Redgrave v. Hurd [(1881) 20 Ch D 1] is a well known illustration. That was not the case here. SCB should not have paid even if they could not have discovered that the representation about the bill of lading was untrue. But in my opinion there are other cases which can be explained only on the basis of a wider rule. In Edgington v. Fitzmaurice [(1885) 29 Ch D 459] the plaintiff invested £ 1,500 in debentures issued by a company formed to run a provision market in Regent Street. Five months later the company was wound up and he lost nearly all his money. He sued the directors who had issued the prospectus, alleging that they had fraudulently or recklessly represented that the debenture issue was to raise money for the expansion of the company’s business (“develop the arrangements…for the direct supply of cheap fish from the coast”) when in fact it was to pay off pressing liabilities. The judge found the allegation proved and that the representation played a part in inducing the plaintiff to take the debentures. But another reason for his taking the debentures was that he thought, without any reasonable grounds, that the debentures were secured upon the company’s land. Cotton LJ said, at p 481, that this did not matter:
“It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if he also relied on the misstatement in the prospectus, his loss nonetheless resulted from that misstatement. It is not necessary to shew that the
misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable.”
Bowen and Fry LJJ gave judgments to the same effect.
15. This case seems to me to show that if a fraudulent representation is relied upon, in the sense that the claimant would not have parted with his money if he had known it was false, it does not matter that he also held some other negligent or irrational belief about another matter and, but for that belief, would not have parted with his money either. The law simply ignores the other reasons why he paid. As Lord Cross of Chelsea said in Barton v. Armstrong [(1976) AC 104, 118]:
“If…Barton relied on the [fraudulent] misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision to execute the deed, for in this field the court does not allow an examination into the relative importance of contributory causes. ‘Once make out that there has been anything like deception and no contract resting in any degree on that foundation can stand’: per Lord Cranworth LJ in Reynell v. Sprye [(1852) 1 De G M & G 660, 708].”
16. In Edgington v. Fitzmaurice [29 Ch D 459] the defence was not that the plaintiff could have discovered that the representation was false. It was that he was also induced by mistaken beliefs of his own, but for which he would not have subscribed for the debentures. That is very like the present case. It is said here that although SCB would not have paid if they had known the bill of lading to be falsely dated, they would also not have paid if they had not mistakenly and negligently thought that they could obtain reimbursement. In my opinion, the law takes no account of these other reasons for payment. This rule seems to me based upon sound policy. It would not seem just that a fraudulent defendant’s liability should be reduced on the grounds that, for whatever reason, the victim should not have made the payment which the defendant successfully induced him to make.
17. As Sir Anthony Evans correctly pointed out, the rule in Redgrave v. Hurd [20 Ch D 1] applies to both innocent and fraudulent misrepresentations. The wider rule in Edgington v. Fitzmaurice probably applies only to fraudulent misrepresentations. In Gran Gelato Ltd v. Richcliff (Group) Ltd. [(1992) Ch 560] Sir Donald Nicholls V-C said that, in principle, a defence of contributory negligence should be available in a claim for damages under section 2(1) of the Misrepresentation Act 1967. But since the alleged contributory negligence was that the plaintiff could with reasonable care have discovered that the representation was untrue, the rule in Redgrave v. Hurd prevented the conduct of the plaintiff from being treated as partly responsible for the loss. This left open the possibility that, in a case of innocent representation, some other kind of negligent causative conduct might be taken into account.
18. In the case of fraudulent misrepresentation, however, I agree with Mummery J in Alliance & Leicester Building Society v. Edgestop Ltd. [(1993) 1 WLR 1462] that there is no common law defence of contributory negligence. It follows that, in agreement with the majority in the Court of Appeal, I think that no apportionment under the 1945 Act is possible.
19. Your Lordships were told that the Solicitors’ Indemnity Fund, which not infrequently has to compensate mortgage lenders who have made loans on the strength of fraudulent statements by partners or employees of solicitors whom the fund has insured, has some concern about the rule that contributory negligence is no defence to a claim in deceit. For example, in Nationwide Building Society v. Richard Grosse & Co. [(1999) Lloyd’s Rep PN 348] Blackburn J said that if contributory negligence had been a defence, he would have held that the plaintiff building society was two-thirds to blame and in Nationwide Building Society v. Balmer Radmore [(1999) Lloyd’s Rep PN 558] he would have said that it was three- quarters to blame. It is easy to see that a rule based upon moral disapproval of fraud is less attractive when the fraudster is not the person paying the damages. But the answer, in my opinion, is not to improve the position of fraudsters but to amend the terms upon which public indemnifiers like the fund are liable: compare paragraph 13(d) of the Criminal Injuries Compensation Scheme 2001.
20. My Lords, I come next to the question of whether Mr Mehra was liable for his deceit. To put the question in this way may seem tendentious but I do not think that it is unfair. Mr Mehra says, and the Court of Appeal accepted, that he committed no deceit because he made the representation on behalf of Oakprime and it was relied upon as a representation by Oakprime. That is true but seems to me irrelevant. Mr Mehra made a fraudulent misrepresentation intending SCB to rely upon it and SCB did rely upon it. The fact that by virtue of the law of agency his representation and the knowledge with which he made it would also be attributed to Oakprime would be of interest in an action against Oakprime. But that cannot detract from the fact that they were his representation and his knowledge. He was the only human being involved in making the representation to SCB (apart from administrative assistance like someone to type the letter and carry the papers round to the bank). It is true that SCB relied upon Mr Mehra’s representation being attributable to Oakprime because it was the beneficiary under the credit. But they also relied upon it being Mr Mehra’s representation, because otherwise there could have been no representation and no attribution.
21. The Court of Appeal appear to have based their conclusion upon the decision of your Lordships’ House in Williams v. Natural Life Health Foods Ltd. [(1998) 1 WLR 830]. That was an action for damages for negligent misrepresentation. My noble and learned friend, Lord Steyn, pointed out that in such a case liability depended upon an assumption of responsibility by the defendant. As Lord Devlin said in Hedley Byrne & Co Ltd v. Heller & Partners [(1964) AC 465, 530], the basis of liability is analogous to contract. And just as an agent can contract on behalf of another without incurring personal liability, so an agent can assume responsibility on behalf of another for the purposes of the Hedley Byrne rule without assuming personal responsibility. Their Lordships decided that on the facts of the case, the agent had not assumed any personal responsibility.
22. This reasoning cannot in my opinion apply to liability for fraud. No one can escape liability for his fraud by saying “I wish to make it clear that I am committing this fraud on behalf of someone else and I am not to be personally liable.” Sir Anthony Evans framed the question [(2000) 1 Lloyd’s Rep 218, 230] as being “whether the director may be held liable for the company’s tort.” But Mr Mehra was not being sued for the company’s tort. He was being sued for his own tort and all the elements of that tort were proved against him. Having
put the question in the way he did, Sir Anthony answered it by saying that the fact that Mr Mehra was a director did not in itself make him liable. That of course is true. He is liable not because he was a director but because he committed a fraud.
23. Both Sir Anthony Evans and Aldous LJ treated the Williams case [(1998) 1 WLR 830] as being based upon the separate legal personality of a company. Aldous LJ referred [(2000) Lloyd’s Rep 218, 233] to Salomon v. A Salomon & Co. Ltd. [(1897) AC 22]. But my noble and learned friend, Lord Steyn, made it clear (at p 835) that the decision had nothing to do with company law. It was an application of the law of principal and agent to the requirement of assumption of responsibility under the Hedley Byrne principle. Lord Steyn said it would have made no difference if Mr Williams’s principal had been a natural person. So one may test the matter by asking whether, if Mr Mehra had been acting as manager for the owner of the business who lived in the south of France and had made a fraudulent representation within the scope of his employment, he could escape personal liability by saying that it must have been perfectly clear that he was not being fraudulent on his own behalf but exclusively on behalf of his employer.
24. I would therefore allow the appeal against Mr Mehra and restore the order which Cresswell J made against him. In enforcing this order, SCB will of course have to give credit for the money it has received from PNSC but how this sum should be apportioned is not a matter which your Lordships have been asked to consider.
