Pentium (BVI) Ltd and Another v KPMG (British Virgin Islands) (A Firm) and Others

• Jurisdiction: British Virgin Islands
• Judge: Hariprashad-Charles J
• Judgment Date: 09 October 2006
• Court: High Court (British Virgin Islands)
• Docket Number: Claim No. BVIHCV2002/0122
• Date: 09 October 2006

THE EASTERN CARIBBEAN SUPREME COURT

IN THE HIGH COURT OF JUSTICE (CIVIL)

Before: Justice Indra Hariprashad Charles

Claim No. BVIHCV2002/0122

(1) Pentium (BVI) Limited

(2) Landcleve Corporation

Claimants

and

(1) KPMG (British Virgin Islands) (a firm)

(2) The Bank of Bermuda Limited

(3) Credit Suisse AG

Defendants

Appearances:

Mr. Stephen Moverley-Smith QC with him Mr. Neil McLarmon and Samuel Jackson Husbands for the Claimant, Pentium (BVI) Limited

Mr. Jeffrey Elkinson with him Ms. Dawn Smith and Ms. Sonja Salmon for the Second Defendant, the Bank of Bermuda Limited

Cases referred to and considered in the Judgment:

Price Meats Ltd. v Barclays Bank plc . (2000) The Times 19 January 2000

Greenwood v Martins Bank Ltd . [1932] AC 51

London Joint Stock Bank Ltd. v Macmillan [1918] AC 777

Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd . [1986] AC 80

Commissioner for the New Towns v Cooper Ltd . [1995] Ch. 259

El Ajou v Dollar Land Holdings Ltd [1994] All ER 685 , C.A.

Neison v Walters 61 L.T. 872

Manifest Shipping Co. Ltd. v Uni-Polaris Insurance Co . [2003] 1 AC 469

Jones v Gordon (1877) 2 App Cas 616

Morris v Bank of India [2004] All ER (D) 378

Twinsectra v Yardley [2002] 2 AC 164

GE Commercial Finance Limited v Gee and others [2005] EWHC 2056

Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563

Mercantile Bank of India Ltd v Central Bank of India Ltd [1938] 1 All ER 58 , P.C

Pentium and Landcleve Corporation v The Bank of Bermuda Limited BVI Claim No. 2002/0122

National Westminster Bank Ltd v Barclays Bank International Ltd and Ismail [1974] 3 All ER 834 ;

Vagliano v Bank of England [1891] A.C. 107

First Energy UK Ltd v Hungarian International Bank [1923] 2 Lloyd's Rep. 194

Man Nutzafahrzeuge AG v Freightliner Ltd [2005] EWHC 2347

CATCHWORDS:

Commercial Law — Duties owed by customer to a Bank — Two signatures required by mandate at the Bank — One signature on instructions to the Bank was forged — Other signature was that of managing director — Forged signature placed on the instructions before managing director signed — Breach of mandate — Whether signature of managing director represents that other signature is genuine

Estoppel — Can the Bank successfully raise the defence of estoppel — Knowledge estoppel — Does a dishonest state of mind has to be proved so as to impute actual knowledge to the managing director, — Are pleadings in another proceedings proof of the truth of facts therein stated — Representation estoppel — Whether the signature of the managing director on the instructions along with the fax cover sheet from the managing director represented that the transactions are genuine — Whether the managing director had authority to communicate the company's approval of the payments

HEADNOTE:

The first claimant (Pentium) was a customer of the second defendant (the Bank). The mandate for the Pentium Account at the Bank required the signature of two Pentium directors; one of which had to be that of the managing director; Matheson Trustees (BVI) Ltd (Matheson) and the other being one of either the three directors of Pentium.

Between 8 March 1996 and 27 August 1998, the Bank was sent by fax a series of wiring instructions in relation to the Pentium Account. The instructions bore the signature of the managing director of Matheson and were purportedly signed by Mr. Gibson (one of the authorized signatories). The Bank paid away funds totaling US$3,137,940 in accordance with the faxed instructions without ever having sight of the originals and debited the Pentium Account with the amount in question.

In March 1999, it was discovered that a colossal fraud was perpetuated by Mr. D'Osvualdo (who is said to have run the Pentium office in Monaco, albeit administratively). Pentium alleges that the purported signatures of Mr. Gibson on the faxed instructions were not his and that they were in fact forged by Mr. D'Osvualdo. Mr. D'Osvualdo has since disappeared without a trace.

The Bank contends that Matheson had actual knowledge of the forgery, that is, that he willfully shut his eyes to the obvious; he willfully and recklessly failed to make such enquiries as an honest and reasonable man would have made and he had knowledge of circumstances which would indicate the fact to an honest and reasonable man. The knowledge of Matheson, being the managing director can be imputed to Pentium. Pentium is therefore estopped from saying that the money was wrongly debited. The Bank relied solely on Pentium's pleadings in proceedings against Matheson to establish that Matheson had actual knowledge of the fraud.

The Bank further claims that the employee who was responsible for the Pentium Account relied on the faxes from Matheson. Matheson, by his signature along with the fax cover page, represented Pentium's approval of the transaction to the Bank. Though Matheson had no authority by himself to instruct the Bank to pay out, it had authority to communicate Pentium's approval of the transactions because of its role as managing director.

Pentium claims that the Bank breached the mandate because they paid out on instructions signed by Matheson only as the other was a forgery. According to Pentium, for Matheson to have actual knowledge or ‘blind eye knowledge’, negligence or gross negligence cannot suffice. There has to be a suspicion or belief and the deliberate refraining from making relevant enquiries. The Bank further contends that by signing Matheson cannot vouch for the signature of the other signatory. Pentium also contends that Matheson did not have authority by itself to instruct the Bank to make payments as two signatures are required by the mandate.

HELD:

• 1. One signature on the instructions to the Bank does not vouch for the genuineness of the other. The purpose of having two signatures is to ensure that the payment instructions is the will of two separate people acting on behalf of the customer, and not just the frolic or fraud of one. If the Bank could rely on the second signature as verifying the first, this protection would be totally undermined.

• 2. The only duties owed by a customer to a Bank are (1) the duty not to draw cheques in a manner which may facilitate fraud or forgery and (2) the duty to inform the Bank once it has knowledge of the forgery.

• 3. The law prevents a court from receiving the contents of a pleading to prove the truth of the facts therein stated. Pleadings are admissible, in subsequent proceedings, to prove their own existence, the institution of the suit and the facts in issue between the parties. But being regarded in other respects rather as the suggestions of counsel than the declarations of the parties, they are not receivable to prove the truth of the facts stated, even as admissions, unless verified by oath, or signed; or otherwise specially adopted by those against whom they are tendered.

• 4. The Bank raised the defence of estoppel as an issue and it is the Bank that bears the burden of proving this defence.

• 5. To prove actual knowledge in these circumstances negligence or even gross negligence is not enough. It has to be shown that there was an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. This is described as a dishonest state of mind. Conscious dishonesty in this sense must be proved. The Bank does not allege that Matheson was dishonest and no evidence led to show that he had the required state of mind, therefore Matheson did not have actual knowledge of D'Osvualdo's fraud.

• 6. In order for estoppel by representation to operate, there must have been a representation made by the person to be estopped to the person claiming the benefit of the estoppel. To form the basis of an estoppel a representation may be made either by statement or by conduct; and conduct includes negligence and silence. The representation must be made voluntarily; if made apparently on another's behalf, it must be made by a person having the authority to do so; it must be communicated to the person to whom it was addressed; the representation must have induced that person to alter his position to his detriment; and only the person to whom it was addressed may use it to support a plea of estoppel.

• 7. A principal who has misled his agent into doing something on his behalf which the agent has honestly done would not be entitled to claim against the agent in respect of the act so done.

• 8. The law recognizes that in modern commerce an agent who has no apparent authority to conclude a particular transaction may sometimes be clothed with apparent authority to make representations of fact.

• 9. The signed instructions along with the fax cover sheet which emanates from Matheson represented more than that the signature might be genuine. It represented that Pentium wanted the transactions processed.

• 10. Although Matheson alone did not have authority under the mandate to order Pentium's money to be paid away, it clearly by virtue of being the Managing Director had authority to communicate Pentium's approval of the transaction and that Pentium wanted these transactions processed.

• 11. The employee at the Bank who dealt with the transactions in question relied on Mr. D'Osvualdo for the ‘heads up’ nothing more nothing less. She did not rely on him in any way whatsoever in respect of what he said in relation to the wiring instructions. She relied entirely on Matheson's directions. In the absence of any evidence of inducement or reliance by the employee on Mr. D'Osvualdo's representations: the Bank's assertion that Pentium is estopped inexorably fails.

Hariprashad-Charles J

1 The single issue for determination in this trial is whether Pentium (BVI) Limited (‘Pentium’) is estopped from denying that the Bank of Bermuda Limited (‘the...