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Banco De Portugal Vs. Waterlow and Sons, Ltd. - Court Judgment

LegalCrystal Citation
CourtHouse of Lords
Decided On
Case Number[1932] UKHL 1
Judge
AppellantBanco De Portugal
RespondentWaterlow and Sons, Ltd.
Excerpt:
the lord chancellor. these are the appeals of the banco de portugal, hereinafter called " the bank," and of waterlow and sons, limited, hereinafter called " messrs. waterlow ", from an order of the court of appeal dated the 26th day of march, 1931, varying the judgment and order of the honourable mr. justice wright, dated the 12th day of january, 1931. the learned judge directed judgment to be entered for the bank for £569,421 with costs. the court of appeal, by a majority consisting of lord justice greer and lord justice slesser, directed that judgment should be entered for the bank for the reduced sum of £300,000, lord justice scrutton dissenting from that judgment, for in his view the bank of portugal was only entitled to the sum of £8,922, which was covered by a payment by.....
Judgment:

The Lord Chancellor.

These are the Appeals of the Banco de Portugal, hereinafter called " the Bank," and of Waterlow and Sons, Limited, hereinafter called " Messrs. Waterlow ", from an Order of the Court of Appeal dated the 26th day of March, 1931, varying the Judgment and Order of the Honourable Mr. Justice Wright, dated the 12th day of January, 1931. The Learned Judge directed judgment to be entered for the Bank for £569,421 with costs. The Court of Appeal, by a majority consisting of Lord Justice Greer and Lord Justice Slesser, directed that judgment should be entered for the Bank for the reduced sum of £300,000, Lord Justice Scrutton dissenting from that Judgment, for in his view the Bank of Portugal was only entitled to the sum of £8,922, which was covered by a payment by the Defendants into Court of £10,000.

The Bank is the Central Bank of Portugal and is incorporated by Special Charter under the Laws of Portugal. Since 1887 it has held from the Government of Portugal an exclusive license for the issue of bank notes as legal tender in Portugal and the adjacent Portuguese Islands, but this license does not extend to the issue of bank notes for the Portuguese Colonies. At all dates material to this case the currency of Portugal was composed solely of notes issued by the Bank. The Bank act as Bankers to the Portuguese Government and carry on a general banking business, having a head office in Lisbon, a branch office in Oporto, and agencies and correspondents in various towns and places throughout Portugal and the Islands.

The Governor of the Bank is appointed by the Portuguese Government and presides at Directors' meetings. The Directors at all material times selected the names of three of their number, out of which the Government in its turn selected one to act as Vice-Governor. The Directors areappointed by the General Meeting of the Shareholders. The Government also at all material times appointed a Secretary-General whose duties were defined by Article 66 of the Statutes of 1892. This Article prescribed (inter alia) that he shall "satisfy himself of the strict observation of the Bank's Statutes and regulations ... in order to be able to appreciate the situation of the Bank as regards the safeguard of the Public interest and of the fiduciary circulation." He did not vote at Directors' meetings.

Messrs. Waterlow are a well-known firm of printers having their registered office at 26, Great Winchester Street in the City of London. A considerable proportion of their business consists of bank note and security printing. Under a contract dated the 27th November, 1922, and a repeat order under that contract dated the 20th February, 1924, the Bank employed them to print and supply certain bank notes required by the Bank for issue in Portugal. Under this contract and repeat order Messrs. Waterlow supplied to the Bank 600,000 notes of a face value of 500 Escudos. The said notes contained on their face a portrait of Vasco da Gama and are referred to as 500 Escudos notes of the Vasco da Gama type. These notes were delivered to the Bank in 1923 and 1924 and all or nearly all of them were put into circulation. The value of the Escudo at dates material to this case was approximately Two Pence Halfpenny, so that a 500 Escudo note was worth approximately £5.

The notes of the Bank are at present inconvertible; that is to say, the Bank is under no obligation to replace them when presented by anything else than its own notes. The Learned Judge found, and the Court of Appeal agreed with him, that the prospect of the notes ever becoming convertible with gold was so remote that it might be disregarded. With that finding I agree. The amount of notes which could be issued was controlled by law. Within these limits it was subject to the policy of the Bank. The right was accompanied by conditions as to the maintenance of reserves and prohibitions as to certain classes of business.

For example:—By Article 28 of the Law of the 29th of July 1887.

The Bank is expressly forbidden from carrying out the following operations:—

(a) To purchase for its own account any shares in the Bank.

(b)To rediscount its own bills.

3. To carry out any Stock Exchange operations which cannot be immediately liquidated even if for account of third parties.

4. To pay interest on any cash received in account current payable at sight.

5. To promote or take part in the creation of commercial banking or other undertakings.

(f)To undertake any risky negotiations or insurance.

(g) To buy and sell, for its own account, any commercial goods.

(h) To possess real estate and rights apart from the City premises necessary for the carrying out of its functions, except through the effect of any assignment or Public Sale, or in order to secure the repayment of credits, but it will have to proceed to the liquidation of such goods (or " estate ") within the shortest period possible.

Again, there was an obligation upon them to issue notes on Government service. Finally, it must be remembered that the Bank is a Bank of Issue with control and management of the currency. Its directors were only entitled to issue notes as far as in their reasonable opinion it was right and proper for them to do so in their capacity as guardians of the currency of the country.

In the course of 1925 Messrs. Waterlow, as if has been found by the Courts below, and as they admitted on Appeal, were guilty of a breach of an absolute duty to the Bank under the contracts referred to because, without authority from or the knowledge of the Bank, they printed and delivered to one Marang van Ysselvere 580,000 notes of 500 Escudos of the Vasco da Gama type.

Marang was one of a group of criminals, among whom was the Portuguese Minister at the Hague. The criminals having obtained the notes from the Messrs. Waterlow introduced them into Portugal and proceeded to put a very large number of them into circulation there.

These notes were printed either from the same plates as had been used for the notes printed for the Bank or from plates made from the same die. Each of the Bank's notes bore a serial letter and number and the signatures of the Governor and one or other of the Directors. 490,000 of the said 580,000 were exact duplicates of notes printed for the Bank and were indistinguishable from the genuine notes delivered to and issued by the Bank except by certain tests unknown to the Bank and depending on data which were exclusively in the possession of Messrs. Waterlow. These tests involved various matters, such as the existence and the significance of minute letters on the genuine and the unauthorised notes and of minute differences between the genuine and the unauthorised notes in the distance from one typographical element to another on the face of the note. The notes were delivered to Marang as to 200,000 in February and March, 1925, and as to 380,000 from August to November, 1925.

In order to facilitate the putting into circulation of very large quantities of these notes the criminals formed a Bank known as the Banco Angola e Metropole. Under Portuguese law in order to constitute and operate a Bank it was necessary to obtain the authority of the Minister of Finance, who was advised on such matters by a body known as the Banking Council. The Minister of Finance on the 27th June, 1925, authorised the formation of the Banco Angola e Metropole on the condition, among others, that the capital of that Bank, the minimum figure for which he had previously fixed at 20,000,000 Escudos, should be fully subscribed. This condition was accepted and as the criminals had already received notes to an amount of 100,000,000 Escudos from Messrs. Waterlow, they were able promptly to comply with it.

The Banco Angola e Metropole, having been formed, proceeded to carry out transactions on a large scale, but their business fell under suspicion and upon the 19th November, 1925, the Minister of Finance instructed the Inspector of Banking Commerce to investigate their activities. On Friday, the 4th December, 1925, the Manager of a private Bank in Lisbon called upon Dr. Ulrich, a Director of the Bank, and informed him of certain suspicious dealings affecting the Banco Angola e Metropole at Oporto, and Dr. Ulrich communicated with the Assistant Judge of Criminal Investigation. On the evening of that day a number of officials both of the State and the Bank went to Oporto. On the following day the premises of the Banco Angola e Metropole were searched by the police. Many packets of 500 Escudo notes of the Vasco da Gama type were found, but apparently the notes, though new, were not consecutive, nor were the series the same. Instructions were given that all notes of this type in the Oporto branch of the Bank should be arranged in series, and also that 2,000 of the notes found on the premises of the Banco Angola e Metropole should lie similarly arranged. Late on the night of the 5th. Saturday, or early on the Sunday morning, the 6th. four notes, each in duplicate, making eight in all, were discovered among those in the Bank's Branch and this was conclusive proof of forgery.

The Bank's officials returned immediately to Lisbon, and on the Sunday evening a meeting of the Bank's Directors was held. The position was certainly alarming. It was obvious that there were forged notes in existence, but how, when, where and to what extent the forgeries had taken place was entirely unknown. After prolonged consideration, the Bank resolved to withdraw from circulation the notes of 500 Escudos, 2nd Plate, gold, on which appeared the effigy of Vasco da Gama. The notice was given in the following terms, and was published in the '' Diario de Noticias " and in the " Seculo " of the 7th December, 1925, and other papers:

The Administration of the Bank of Portugal has resolved to withdraw from circulation the notes of 500 Escudos, 2nd plate, gold, on which appears the effigy of Vasco da Gama.

In view of this resolution, the notes of this type and plate now in circulation are to be exchanged for others of the same or some other denomination at the Head Office of the Bank in Lisbon, at the Branch Office in Oporto and at the Offices of its Agencies on the Continent and in Funchal.

Lisbon, 7th December, 1925.

For the Bank of Portugal.

THE DIRECTORS:

J. motta gomes, Junior, manuel casal ribeiro carvalho."

The result was a run on the Bank, and in the course of the next few days many thousands of notes both good and bad of the Vasco da Gama type were brought by their holders to the Bank or one of its branches, and for each note so brought into the Bank, the Bank handed to the holder a good note for 500 escudos.

On the 7th December the Bank telegraphed to Messrs. Waterlow as follows:—

(Despatched at 2.25 p.m. Reed. 5.14 p.m.)

Imprimerie,

London. 7th December, 1925.

Great falsification notes of five hundred Escudos send expert Lisbon urgently to examine. Make investigations on your side.

"Bank of Portugal,

                                                     "camacho rodrigues."

Messrs. Waterlow replied in the following terms:—

Camacho Rodriguez,

Bank of Portugal,

Lisbon. 8th December, 1925.

Your cable 7th received. Arranging for expert to leave London immediately. Will wire you actual time and departure. Write fully and send specimens.

                                             waterlow and sons, ltd."

        (Despatched 12.25 p.m. Received 1.56 p.m.)

Sir William Waterlow, accompanied by two other of his directors, had interviews with Colonel Lucas in London, who was acting on behalf of the Bank, and eventually left for Lisbon, where he arrived upon the 13th December. Meantime the Bank had been exchanging the notes in the way above mentioned.

It ought here to be said that no suggestion has been made, or can be made, against the honesty of Messrs. Waterlow. They were, just as much as the Bank was, victims of Marang's fraud, but when Sir William Waterlow arrived in Lisbon he was an object of suspicion (as indeed the Directors of the Bank themselves had been) and was for a time kept at arm's length.

In the result, the Bank finally found itself in possession of 799,190 Vasco da Gama notes, and of these it was subsequently ascertained that 209,718 were notes printed without authority by Messrs. Waterlow for Marang, and which are hereinafter referred to as the, Forged notes.

On December 1st, 1925, the note circulation of the Bank consisted of two classes: (1) notes issued as loans to the Government which the Government would put into circulation, and (2) notes issued by the Bank for its ordinary commercial needs, against a certain specified reserve of gold much less than the face value of the notes.

The total note circulation in Portugal was about 1,700,000,000 Escudos (seventeen million pounds). Messrs. Waterlow had printed and delivered to Marang notes to the value of 290 million Escudos, or about one-sixth of the total note issue. Of these, notes to a value of over 100 million Escudos (one million pounds) had been put into circulation. They had been put in circulation from time to time from some date in the first half of 1925. They must have passed from hand to hand. Many of them must have been paid into the Bank's head office or some branch office of the Bank, and been re-issued. On such notes the Bank would certainly be liable, and it had no means of knowing whether any note had, or had not, been re-issued

Notes to the value of 195,630,000 Escudos had been authorised against a 15 per cent, minimum gold reserved for the Bank's commercial business as bankers. Of this amount the Bank had prior to the 7th December, 1925, issued about 65 million Escudos. The unissued balance of about 131 million Escudos constituted reserves on which the Bank could draw as and when they required to do so. It may here be stated that as a result of Messrs. Waterlow's breach of contract, the note issue was increased by approximately 104,859,000 Escudos, and the unissued balance was thus considerably reduced.

Within a short space of time, i.e. by July, 19th, 1926, the Bank obtained a considerable increase in its power to issue notes. The Government by the Prime Minister had approved of the original action of the Bank on December 6th, 1925, and the delay in regulating the position, as appears from the preamble to the Decree of July 19th, 1926. resulted from a change of Government, which interrupted negotiations. That Decree authorised (1) an issue of a hundred million Escudos to be repaid out of the anticipated indemnities from Waterlows. It is not suggested that this loan from a third party can be used to reduce damages due from Waterlows: (2) a further issue of a hundred million Escudos to be used for commercial operations; (3) a further issue of 125 million Escudos, to be used in colonial development, which does not affect this case.

The Plaintiffs, the Bank, issued a writ upon the 5th day of April, 1928, claiming damages for breach of contract and /or negligence and/or conversion. In their Statement of Claim, the Plaintiffs added a count under the Copyright Act, but this and the claims for negligence and conversion were not pressed on appeal, and they relied upon the Breach of Contract only. Such Breach of Contract is set out in the 9th paragraph of their Statement of Claim and is as follows :

In breach of the express terms of the said contract and /or negligently and in breach of the implied terms as set out in paragraph 4 hereof and /or negligently and in breach of the duty set out in paragraph 5 hereof, the Defendants between January, 1925, and September 1925 without the authority of the Plaintiffs printed from the said plates and /or from plates made from the said die or dies on paper made to the Plaintiff's specification and bearing the watermark " Banco de Portugal " and delivered in London to one Marang a Dutchman about 580,000 bank' notes of the value of 500 Escudos each of the said Vasco da Gama design purporting to be banknotes of the Plaintiff "Bank."

The particulars of damage originally amounted to the sum of £1,115,613, but the Bank professed itself willing to give credit, for the sum of £488,430, which they had received in the liquidation of the Banco Angola e Metropole, and so the net claim was £610,392.

By their Amended Defence, Messrs. Waterlow denied that the Contract of the 27th November, 1922, was subject to the implied terms alleged; they denied that they were guilty of any breach of the express or implied terms of the contract; they denied that the Bank had suffered any loss and alleged in the alternative that, if the Bank had suffered any loss, such loss was caused solely by the Bank's own voluntary act in withdrawing from circulation the Vasco da Gama 500 Escudo notes and exchanging them for other notes although the Forged notes or some of them which were in circulation were distinguishable from the authorised ones and although the Bank were under no liability to pay the unauthorised notes; and in the further alternative they alleged that any damage was caused by or contributed to by the negligence of the Bank.

In this state of the pleadings, the matter came before the Learned Judge. In effect he rejected the contentions of Messrs. Waterlow, both as to the amount of damage and the measure of damage. He, however, was of opinion that by December 16th, the Bank knew (or ought to have known) the tests by which they could distinguish some of the forged notes from the authorised notes, and he held that from that date Messrs. Waterlow were not liable for damages in respect of the good notes which they gave in exchange for forged notes, and upon this basis gave judgment for the amount above referred to, and not for the whole of the Bank's claim.

When the matter came before the Court of Appeal, all the Learned Lords Justice agreed that the Bank were justified in calling in the Vasco da Gama type notes and exchanging good notes both for the authorised and Forged notes, but Lord Justice Greer and Lord Justice Slesser came to the conclusion that the Bank knew (or ought to have known) how to distinguish between the authorised and the Forged notes by December 10th, instead of by December 16th, as Mr. Justice Wright had held, and acting upon this finding they reduced the damages to a round sumof £300,000 to cover all items. Lord Justice Scrutton took a contrary view. He was of opinion that the Bank were justified in exchanging all notes up to as late a date as December 26th, but he also held that a different measure of damages applied : namely, that the only loss which the Bank had really suffered was the loss incurred in printing new notes to give out in exchange for the Vasco da Gama issue.

In the result, judgment from the Court of Appeal was given for £300,000, and from that the present appeal is brought.

The main questions in the Appeal are briefly:

(a) Whether the Bank, issuing an inconvertible currency, i.e., having right to issue notes but no obligation to honour them otherwise than by giving in exchange other notes, until some future return to convertibility at a date so remote and unlikely to occur that it could riot be taken practically into account, suffered any other than a merely nominal loss (apart from the cost of printing) when they called in bad notes put into circulation by forgers and gave good notes in exchange for them.

2. Whether in the circumstances of this Case the Bank, when they gave in exchange for a forged note ofthe face value of 500 Escudos a good note of that face value, could properly be said to have suffered a loss of 500 Escudos, with the result that Water Iowa, who are liable by reason of a breach of contract which enabled the forged notes to be put into circulation, are bound to pay to the Bank 500 Escudos converted into sterling at the rate current at the date of the loss.

3. Whether the Bank gave evidence of, or proved, any loss at all.

4. Whether if the Bank proved any loss, such loss was not caused in whole or in part by the voluntary action of the Bank themselves or was not in whole or in part such a loss as could not fairly and reasonably be considered as arising naturally from the breach of contract or such a loss as could not be reasonably supposed to have been in contemplation by both parties at the time of making the contract as the probable result of the breach, or whether the loss was not aggravated by the failure of the Bank to take reasonable steps to limit the loss.

Messrs. Waterlow, on appeal, did not dispute the proposition that they were guilty of a breach of absolute duty under an implied term of the contract.

It will be convenient to take first the question whether the Bank were justified in exchanging new notes for the Vasco da Gama notes (both authorised and forged) as and when they did. It will be observed that upon this point we have concurrent findings in the Courts below. Both Mr. Justice Wright and all the three members of the Court of Appeal held that they were, the only difference of opinion being up to what period they were so justified.

In coming to a proper determination of this question, it is important to recollect the position of the Bank both before and after the discovery of the forgeries. It will be recollected that the Bank was in effect the National Bank of Portugal, the sole issuing Bank in that country, and the Bank upon which the credit and currency of the country depended. This appears from the answers given by Dr. Ulrich in his examination in chief:

Q. 286.—Supposing that you had refused to pay any Vasco da Gama notes, what would the effect have been on the public as regards your issue of notes altogether, in your opinion?

I think the effect would be very extremely serious because the people seeing that the Bank were refusing a note of a certain type would easily have been inclined to think that next day another can be refused in the same way. In these conditions there would have been a general discredit for all the notes of the Bank, that means for the total currency of the country. I cannot really easily foresee the effects coming from such a measure, but it is easy to understand that if anybody has merchandise in his power of a certain and definite value he would have refused to exchange his merchandise against a piece of paper of a doubtful value or discussed value, so the country would have been brought to a general stoppage for the economical life of the country and naturally the people in Portugal would have taken the most severe violences against the Bank, and I am sure that a Revolution would have been brought about by this fact.

Q. 287.—In your opinion, that would have been the internal result in Portugal ?—Yes.

Q. 288.—What about the external result as regards Foreign Exchanges I

I think the market for Portuguese currency abroad would have been suppressed at once, no bank would have been willing to sell Escudos when they knew the Escudos were paid in paper of doubtful value and of discussed value, so the Foreign Exchanges of the country probably also would have been stopped.

Similar evidence was given on the Bank's behalf by other witnesses called by them, and the Learned Trial Judge said :—

The justification for acting with such promptitude which is put forward, and I think put forward with foundation, was that it was already known and could not be suppressed that there was this great falsification of notes going on, that the only way to avoid a financial crisis and an entire upheaval of the currency was to withdraw this issue, and that there was no opportunity of further delay because the consequences of delay would have been too serious to contemplate. ... At least 4,000 notes ready to be issued had been found in the Banco Angola e Metropole, and what the Plaintiffs did was simply done in order to maintain the credit of their currency and of their Bank, and was, so far as I can judge, and as I hold, done reasonably in all the circumstances. It was a necessary and indeed, in all the circumstances, an inevitable consequence of the falsification and circulation of these spurious notes.

Lord Justice Scrutton, commenting upon this, says:—

The Judge below has found that by December 16th the Bank might have discovered a means of identifying some of the forged, notes. The Bank by Government Decree stopped paying all Vasco da Gama 500-Escudos notes after December 26th. Mr. Justice Wright has deducted from the damages £80,000, for notes paid after December 16th. As he finds that the Bank were justified in their action on December 7th in calling in the issue and paying all notes, he must have found that they would have been justified when they could distinguish the forged notes, which innocent holders could not do, in refusing to pay some forged notes, while paying others. Such an action in my opinion would destroy all confidence in the paper currency. It was the Bank's own printers who had from the Bank's own plates wrongly put this unauthorised currency on the market. It was indistinguishable to innocent holders from genuine currency, and I cannot think the Bank was bound to sacrifice innocent holders and the reputation of its national currency to protect the printers, the wrongdoers.

In England the law is that a person is not obliged to minimise damages on behalf of another who hasbroken a contract if by doing so he would have injured his commercial reputation by getting a bad name in the trade. Finlay and Kwik Hoo Tong, 1929 1K.B. 400. The evidence is that the Bank—remembering always that they were the issuing Bank of the paper currency—had to protect before anything else the confidence which such currency inspired in the Portuguese public. What confidence, they asked, would all the other notes of the Bank of Portugal merit if the Bank did not adopt such a policy?' It is one, they say, always adopted and similar to that adopted as a rule by banks of issue, even when they can allege the forgery is manifest and that the public has not taken the precautions necessary in receiving false notes. I have come to the conclusion that the Bank would have been failing in their duty to their shareholders, their customers and their country if they had not taken the step they did.

In my opinion these findings are correct, and the Bank had no alternative on December 7th but to do what they in fact did. They were in a position of extreme difficulty and extreme danger, caused, as I think, by the unfortunate and unwitting breach of contract on the part of Messrs. Waterlow.

As the Bank urge, for a country to find that what it believed to be a substantial portion of its legal wealth was nothing more than worthless pieces of paper instead of genuine notes of the Bank would have created an economic panic and confusion which would have caused the gravest damage to the credit of the Bank and might even have shaken the whole economic and commercial life of the country.

I now pass to a consideration of whether December 10th, as Lord Justice Greer and Lord Justice Slesser held or December 16th, as Mr. Justice Wright held or December 26th as Lord Justice Scrutton held, is the correct date for determining when the Bank's knowledge was of such a character as disentitled them from exchanging new notes for the Vasco da Gama notes, both authorised and forged. I would add here that the Learned Counsel at the Bar of Your Lordships' House, arguing on behalf of Messrs. Waterlow, endeavoured to persuade the House that the Bank ought not to have acted so precipitately in giving notice of calling in, and that they must have known by December 9th how to distinguish between the authorised and the forged notes, and so that they ought not to have exchanged any more after that date.

This is, largely, a question of fact, but having come to the conclusion that the Bank were entitled to issue their notice on December 7th, I reject the argument for Messrs. Waterlow that the Bank acted too precipitately, and the only question therefore remaining is whether December 10th, December 16th or December 26th is the proper date to take as being that upon which the knowledge of the Bank was such as disentitled them from paying out further good notes.

It appears to me that Lord Justice Scrutton was right for his reasons above referred to in rejecting the contention that December 10th or December 16th was the date to be taken as the one upon which the Bank, knew or were in a position to know, how to distinguish certain of the notes. The Bank in fact exchanged new notes for forged notes as late as July, 1927. Logically I can see no reason why they should not claim from Messrs. Waterlow any damage properly flowing in respect of notes so exchanged so late, and upon this showing even the date fixed by Lord Justice Scrutton of December 26th would have to be reconsidered. I agree, however, that December 26th is the proper date and for the following reason. By a notice issued by the Ministry of Finance in Portugal it was ordered that the 22nd day of December should be fixed as the last day for the exchange of notes. This date was subsequently extended to the 26th December, and I am content to leave it at that.

What then is the amount of damages to which the Bank are entitled upon that date, subject to the question of the correct measure of damages?

Taking December 26th as the date, it remains to be considered how the sum of £488,430 which the Bank recovered in the liquidation of the Banco Angola e Metropole is to be dealt with. It was contended by Messrs, Waterlow that this sum ought to be treated as salvage in respect of the total loss suffered by the Bank in respect of the unauthorised notes. It wais said that in the present action the amount to be recovered was in respect of part only of those notes, namely, 209,718 less 16,000 notes, and that any credit to be given must be based on the same subject matter, namely, salvage in respect of 209,718 less 16,000 notes, i.e. twelve-thirteenths of £488,430, namely £450,860. In my view this is not the true principle applicable. Legally, Messrs, Waterlow may not be entitled to any credit in respect of this sum of £488,430, as the amount was recoverable against different parties and on a different cause of action. The Bank, however, do not desire to stand upon their strict rights, and in my opinion, if the total amount to be recovered from Messrs. Waterlow added to the sum of £488,430 exceeds the total loss actually incurred, Messrs. Waterlow should have credit for such excess. The Bank's total loss was £1,092,281 plus £6,541. Against this, credit should be given for £488,430, leaving a net loss of £610,392. This is the principle laid down by the Court of Appeal in the case of the Morgengry and The Black- cock, 1900 P. p. 1, and it is that principle which in my view should be following in the present case.

I now pass to the question : What is the true measure of damages ?

Two points are taken on behalf of Messrs. Waterlow. They contend -

1. The loss, if any, suffered by the Bank was caused in whole or in part by the voluntary action of the Bank and /or was in whole or in part a loss which could not fairly and reasonably be considered as arising naturally from Waterlow's breach of contract and was a loss which could not reasonably be supposed to have been in contemplation of both parties at the time of the making of the contract as the probable result of the breach.

2. The loss suffered by the Bank, if any, was merely nominal, being the present value of the liability at an undetermined and undeterminable future date, to give gold or other value for the good notes it issued in exchange for bad notes.

As to (1), the law is as follows : The leading case in English law is that of Hadley v. Baxendale, 1854, 9 Exchequer, Page 341, where it is laid down by Mr. Baron Alderson, giving the Judgment of the Court:

We think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it. Now if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendant, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he at the most could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases, not affected by any special circumstances from such a breach of contract. For had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. The above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract.

It was similarly stated by Lord Blackburn in the House of Lords in Livingstone v. The Rawyards Coal Company (1880) L.R. (5 A.C. 25, at Page 39), in these words:—

Where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been if he had not sustained the wrong for which he is now getting hiscompensation or reparation. There is no doubt as to the law; the real difficulty is to apply it to the peculiar facts of this case.

The first question is, " Was this loss one which could reason" ably be supposed to have been in contemplation by both parties at the time of the making of the contract as to the probable result of the breach? This rule has often been criticised on the ground that people when they make contracts do not contemplate their breach. Be that as it may, I have come to the conclusion that Lord Justice Greer was right in taking the view that it would be naturally in the usual course of things, and would be within the contemplation of the parties (1) that in circumstances like those which happened in the present case, the Bank would be compelled for their own protection to issue a public notice informing the holders of their notes that the only notes of which forgeries had been discovered were the Vasco da Gama issue; and (2) that they would also be compelled in the interest of their own credit and currency to act reasonably in the matter, and (3) that it would be reasonable to exchange any of those forged notes which were presented for payment for valid notes of an equal value. Once this is found, as it has in my view been rightly found in this case, that the Bank acted reasonably, and it is also found that Messrs. Waterlow committed a breach of contract, the resulting consequences from such reasonable action must be damages which the Bank are entitled to receive in respect of breach of contract, because they are damages fairly and reasonably to be considered as Arising naturally, i.e., occurring in the usual course of things from such breach of contract, as the probable result of the breach.

As to (2), I now turn to the Last and, in my opinion, most difficult part of the case.

Was the loss suffered by the Bank merely nominal and was the only sum recoverable by them the cost of printing and paper in regard to the new issue?

Upon this point Mr. Justice Wright said : "In Portugal these notes are currency. They are the currency of Portugal. They can purchase commodities in Portugal, including gold, which after all is only a commodity like any other, though it is raised in financial affairs to a special pre-eminence as a convenient medium for fixing values, they can buy foreign exchange, that is sterling or dollar exchange, they can buy any exchange in any currency which is convertible and they "do that because they have behind them the credit, that is the liability, of the Bank of Portugal.

And Lord Justice Greer states it in a similar way. He says : Every 96 Escudos issued by the Bank in form of paper notes in exchange for the Marang (forged) notes was worth £1 in English money, because it would buy in Portugal, and by exchange all over the world, the same amount of goods as the pound sterling 14824 A 6 would buy. . . . In my judgment the Bank are entitled to say to the Defendants ' By your wrong I lost a certain number ‘of Escudos worth X pounds, give them back to me in English money at the rate of exchange at the date of my loss.' In the present case the Bank, by reason of Messrs. Waterlow's breach of contract, had to increase their note issue by 104,859,000 Escudos, and received in exchange for each bank note no value at all, but only worthless bits of paper.

Upon each of the good notes so exchanged, the assets of the shareholders were diminished to the extent of the liability which the Bank assumed for the good note which they had given in exchange for the worthless note.

Some confusion appears to me to have arisen in this case by dwelling too much upon the fact that the notes were not convertible into gold. In my opinion that fact has nothing to do with the case. In a country where there is a managed currency a note when issued by a Central Bank becomes part of the currency of the country and obtains a certain value which may for the moment be called its market value. The fact that it is not convertible into gold is reflected in the price the note fetches in the terms of any foreign exchange. We are not here considering the case of an unlimited right to issue notes. The essence of the right conferred on the bank of issue in this case was the ability, within limits allowed by law, to print and issue its notes as currency and for value. The notes are the currency of the country, and have the value of that currency when issued. Whatever may be the conditions imposed as to reserves and whether the currency is convertible or inconvertible, a bank of issue receives value for every note which it issues.

This consideration has to be kept in view during the whole of the present case. It must never be forgotten that the Bank was a bank of issue. The notes may be advanced as loans to the Government or private persons; they may be used to buy gold or securities, to discount bills or to pay the Bank's debts, and the notes may also be received from a customer of the Bank in order to reduce an over-draft at the Bank. In every instance the Bank obtains the currency value of the notes, or may receive it, in discharge of a liability due to the Bank.

Analogies may be misleading, if not dangerous, in these peculiar and unusual circumstances. The simplest way of posing the problem is to imagine two persons coming into the Bank at, the same time, each of them wanting a good 500 Escudos note. The first is an Englishman who wants to get some Portuguese money. He hands over to the Bank five English pounds, and gets in return a 500 Escudos note. The other person hands over a forged note, and also gets a 500 Escudos note. What is the position of the Bank In the first case it has obtained in exchange for the 500 Escudos note five pounds in English money; in the second case it has got in exchange for the 500 Escudos note a worthless forged note. It is not possible to say that in the second case the Bank has suffered no damage because it could print and issue a third 500 Escudos note should it so desire to do. For that note it could also have obtained value. In truth it has lost the face value of the second note by reason of the fact that it has only got a worthless note in exchange.

I am, however, unable to accept in its entirety the argument put forward by the Bank in their Reason 16, where it is stated that the Bank's notes, being the currency of the country, have the same value in their hands as in those of third parties. What exactly is meant by the words "in their hands" it is difficult to appreciate. A banknote is, after all, merely a promise to pay in some form or other. Supposing the Bank had had in its cellars, say, for example, 1,000 of these notes, and owing to the negligence of some contractor who happened to be engaged in repairing the premises, a fire had broken out and all the new unissued notes in the Bank's cellars had been burnt, it would not be possible to contend that the contractor whose negligence had. caused the loss of the notes would be liable for their face value. He might in such an instance be liable for the cost of paper and printing of each note, but it is a completely different position when the notes, instead of remaining in the cellar, are rightly, as is found in this case in the circumstances, put into circulation by the Bank. Then their value is entirely changed. Again, it is possible to conceive of cases where a person who has been deprived of a chattel by the negligence of another is entitled to recover from such other the replacement value of such chattel, but the present case is not an example of that character. Here the issue of the note and putting it into the currency of the country, which the Bank were entitled to do, makes all the difference.

For these reasons, I am of opinion that the Appeal of the Bank succeeds and that judgment should be entered for the Bank for the sum of £610,392. The appeal of Messrs. Waterlow should be dismissed.

Lord Warrington of Clyffe.

My lords,

These are two appeals from an Order of the Court of Appeal dated the 26th March, 1931, varying the Order and Judgment of Wright J. dated the 12th January, 1931, whereby he directed that judgment be entered for the Bank for £569,421 with costs. The Court of Appeal by a majority (Greer and Slesser L.JJ.) reduced the damages to £300.000, and unanimously dismissed a cross-appeal by the Bank that this sum should be increased to £611,851. Scrutton L. J. was of opinion that no larger sum than £8,922 was recoverable by the Bank. The Bank by their appeal seek to have the damages "increased to £610,392 or alternatively to £567,040. Messrs. Waterlow on the other hand seek to have the damages reduced in accordance with the opinion of Scrutton L.J.

It is now admitted by Messrs. Waterlow that they are liable to the Bank in damages for breach of contract and the only question before this House is as to the damages to be awarded.

I do not propose to restate in detail the facts already related in the opinion of the Lord Chancellor but only to give a summary sufficient to render my conclusions intelligible.

The Bank is incorporated under the laws of Portugaland holds from the Government an exclusive licence for the issue of banknotes as legal tender in Portugal and the adjacent Islands, but this does not extend to the Portuguese Colonies. At all material dates the currency of Portugal was composed solely of notes issued by the Bank. They act as Bankers to the Government and carry on a general banking business with a head office at Lisbon and a branch in Oporto and numerous agencies in other places. At all material dates the notes of the Bank were and they still are inconvertible, that is to say they are not payable in gold but only in the currency of the State.

The unit of currency is the escudo, nearly equivalent at par to the American dollar and denoted by the same symbol, viz., $. The notes to which the present litigation relates are those of 500$. It is agreed that for the purpose of assessing damages the

equivalent in sterling of 500$ would be £5.

The contract, the breach of which has occasioned the litigation, was made between the Bank of the one part and Messrs. Waterlow of the other part, and was dated the 27th November, 1922. Under it and a repeat order dated the 20th February, 1924, Messrs. Waterlow printed and delivered to the Bank 600,000 notes for 500$ each. They are known as notes of the Vasco daGama type, bearing as they do a portrait of Vasco da Gama on the face. These 600,000 notes as delivered were put into circulation by the Bank in 1923 and 1924.

In 1925 the Bank and Messrs. Waterlow were made the victims of an elaborate fraud on the part of one Marang and his associates, and Messrs. Waterlow were induced, in the belief that they were acting with the approval of the Bank, to print and deliver to Marang 580,000 Vasco da Gama notes. These notes were exact duplicates of the genuine notes printed under the contract, being printed from the same plates or from plates made from the same die. These notes were delivered to Marang as to 200,000 in February and March and as to 380,000 in August and September, 1925, and large numbers were put into circulation by means of a Bank known as the Banco Angola e Metropole, formed by the conspirators for that purpose.

It is now common ground that in printing and delivering to Marang the 580,000 notes Messrs. Waterlow committed a breach of their contract for which they are liable to the Bank in damages.

There is no doubt as to the law applicable in such cases. It is sufficient to quote the well-known rules laid down in Hadley v. Baxendale 9 Exch. 341 in the judgment of Lord Blackburn:—

We think the proper rule in such a case as the present is this :

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things from such breach of contract " itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of breach of it." Moreover, it is well settled that a voluntary act on the part of the injured party does not necessarily break the chain of causation between the wrong which occasioned the voluntary act and the damages. If the voluntary act is one which would be reasonably expected in the ordinary consequence of a breach of contract it is not a sufficient answer to say that the damage would not have happened but for the Plaintiff's voluntary act.

In the present case the introduction by reason of Messrs. Waterlow's breach of contract into the currency of Portugal of a large number of spurious notes indistinguishable from the genuine notes would, if some drastic step had not been at once taken by the Bank, have had an incalculable and disastrous effect on the economic position in Portugal as well as on the reputation and credit of the Bank, as the body responsible for the issue of currency. As a consequence of the discovery, the result of investigations made at Oportoon the 4th and 5th December, 1925, of. the fact that a number of the spurious notes were in circulation, the Bank on the Sunday, the 6th December, determined immediately to withdraw from circulation the whole of the Vasco da Gama notes of 500$ and to have notices published in the papers of Lisbon and Oporto advising the public that the cashing of the said notes would be effected at once at the chief office of the Bank and at all its branches. Such notices were duly published on the morning of the 7th December, and from that date onwards until the process was stopped as hereinafter mentioned all notes of the type in question whether genuine or spurious presented at the head office of the Bank or at any branch or agency were exchanged for currency of another type.

It is for the loss occasioned to the Bank by the exchange of genuine currency that the damages in this action are claimed.

On this claim the following questions arise :-

Was the loss occasioned to the Bank such a loss as in accordance with the rules above referred to could be recovered in damages for breach of the contract?

If so, what is the measure of such damages ?

Was there any and what date as from which by reason of matters coming to the knowledge of the Bank subsequently to the 7th December they ought as between themselves and Messrs. Waterlow to have ceased to exchange spurious notes for genuine currency and thus have minimised the loss ?

In what way and to what extent ought moneys recovered from the perpetrators of the fraud to be credited to Messrs. Waterlow in reduction of damages ?

The first question has been answered in the affirmative by all the Judges in the Courts below, and I agree with their decision. It is in my opinion impossible to say that, having regard to tine position at the time, and the possible consequences both to Portugal and to the Bank itself of the circulation of the spurious notes, the action taken by the Bank in exchanging all the notes of the type in question whether genuine or spurious for other genuine currency was not a reasonable step to take, and one which might be expected to be taken as a consequence of such a breach of contract as that in the present case.

As to the proper measure of damages there has been a difference of opinion in the Courts below. The majority (Greer and Slesser, L.JJ.) in the Court of Appeal and Wright J. in the Court of first instance were of opinion that the proper measure of damages was the face value expressed in sterling of the genuine currency given in exchange for the spurious notes, viz., in the present case £5 per note of 500 escudos, together with the cost of printing the genuine notes so given in exchange. Scrutton L.J. on the other hand was of opinion that the loss was confined to the cost of printing the new notes.

This is a difficult and in this case a very important question seeing that in one view Messrs. Waterlow would be liable for a very large sum of money, and in the other for nothing beyond the £10,000 paid into Court with their amended Defence.

There are no principles applicable except such as are expressed in Hadley v. Baxendale A. S. nor are there any authorities which are of help- The damages are however damages for breach of contract and in such cases it has to be remembered that they are exclusively measured by a loss actually incurred by the Bank and capable of being quantified in terms of money.

In reaching a conclusion it is essential to bear in mind that the sole measure of damages on which the Bank insisted at the trial and still insists is the face value, translated into sterling at the rate of £5 for every sum of 500$ issued by them in exchange for a spurious note. They have maintained throughout that in issuing genuine currency in exchange for spurious notes they must be treated as having expended so much cash without receiving any consideration in return, and therefore to be the poorer by the amount so expended. This is made quite clear by Reasons 16 and 17 in their Case. They made no attempt to prove that (except the expense of obtaining the paper and printing the notes) they incurred any other loss or damage, directly or indirectly as for example by the increase in the currency and the consequent depreciation of its purchasing power, or by injury to their credit or interference in their relations with the government or otherwise. All these  considerations may be set aside, and accordingly in explaining the views I entertain by " damages " I mean only such damages as are claimed by the Bank. There may be loss or damage of another kind but this is not in question.

The whole question in my opinion turns on the nature of the obligation incurred by the issuing Bank under the notes it issues. They are in effect promissory notes payable to bearer on demand. So long as they remain in the possession of the Bank they are merely pieces of paper, and if for example they were lost or destroyed while in their possession they could be replaced by printing other notes at the cost of the paper and the printing.

As soon as a note is issued it imposes an obligation on the Bank to pay to the Bearer on demand 500$. This last is the only material obligation in the present case. There may be two others, viz., (a) to pay in gold should the notes hereafter cease to be inconvertible, and (b) to pay in some new form of currency should any such new form be introduced, but these possible obligations are contingent only and are of no importance in the present case.

It is proved by the evidence of witnesses called on behalf of the Bank itself that the only material obligation is satisfied by exchanging the note in question for another note of like denomination. If a judgment were recovered against the Bank it would be satisfied by delivery of currency for the amount.

Where, therefore, the Bank elects, as it has done in the present case, to treat the spurious notes as on the same footing as genuine notes, all it does is to accept an obligation to pay the holders in currency, that is to say, in notes. To do so all it has to do is to take so many pieces of printed paper from its existing stock or to have further notes created should the existing stock be insufficient. In either case, the loss to the Bank is, in my opinion, confined to the expense of procuring the necessary paper and of printing the necessary number of notes.

Wright J., at p. 93 D, says: "They ", that is to say the Bank, " are damaged by having to assume liability on these notes " without getting anything in return. I think this argument is correct, and I think these notes must be taken for this purpose at their face value, just as they would be if they had been issued by some other institution that is not a Bank of issue." With all respect, I cannot accept the conclusion of the learned judge. It seems to me that by treating the Bank on the same footing as '' any other institution " he ignores the vital distinction, viz., that the obligation incurred by the Bank is merely to pay in other currency which it has power to create for the purpose, whereas the institution not a Bank of issue would have to procure the necessary cur rency by expenditure of money or sale of goods or in some similar way or pay it out of currency already in hand. In fact, the 16th Reason breaks down on examination, and its corollary the 17th falls with it.

The next question viz :—at what point of time did the exchange of genuine currency for spurious notes cease to be a natural result of the breach of contract, in the view I take as to the measure of damages does not arise for decision, but if it did, T should agree with the opinion expressed by Scrutton L.J. at page 131 of the Appendix B. to F. He says : " As he (Wright J.) finds that the Bank were justified in their action on 7th December in calling in the issue and paying all notes, he must have found " (viz., in arriving at the conclusion that they should have ceased on the 16th December to pay all the spurious notes without distinction) " that they would" have been justified, when they could distinguish the forged notes, which innocent holders could not do, in refusing to pay some forged notes, while paying others. Such an action in my opinion would destroy all confidence in the paper currency It (the unauthorised currency) was indistinguishable to innocent holders from genuine currency, and I cannot think the Bank was bound to sacrifice innocent holders and the reputation of the national currency to protect the printers, the wrong doers." I think the right, as against Messrs. Waterlow, continued until the 26 December.

Under the circumstances no question arises as to the sum recovered from other persons.

The result is in my opinion that the Appeal of the Bank should be dismissed with costs, and that of Messrs. Waterlow should be allowed with costs.

I need hardly say that it is with great regret after anxious consideration, I have arrived at the conclusion that I must differ from opinions, for which I have the greatest possible respect, but it is some consolation that I do so in good company. I should also like to say that I have been much assisted by the very clear and forcible argument of Mr. Gavin Simonds in reply.

MY LORDS,

In this case your Lordships are, I think, agreed that as the result of the breach of contract by Messrs. Waterlow, the Bank of Portugal issued 209,718 500 escudo notes in exchange for forged notes innocently printed by the Defendants. The question is what damages can be recovered by the Bank. The contention of Messrs. Waterlow is that the Bank, when it issued good notes to the face value of over 100 million escudos in return for no consideration, suffered no damage at all except the cost of printing the good notes. This would have appeared to me a departure from the ordinary principles of assessing damages; but it has found favour with more than one judicial personage for whose opinions I have unfeigned respect, and was urged with much apparent zeal by eminent counsel: so that obviously it demands careful examination. The difficulty, it appears, only arises where the person issuing the notes is a Bank of issue and where the obligation expressed in the note is not to pay in gold but to pay in paper currency, i.e. other notes of the Bank. In such cases it is said the Bank have only parted with bits of paper and their damage is completely measured by the cost of reprinting the bits of paper. The argument strikes home at the present time where our currency is in the main a paper currency, and where the Bank of England are under no liability to pay their notes in gold. I hope to satisfy your Lordships that if the Bank of England by fraud or breach of contract are induced to issue a million pounds worth of notes for nothing they are entitled to recover against the wrongdoer a million pounds in damages. The result of the present contention is sufficiently striking. If the issue of $10,000 good notes by the Bank of Portugal for nothing involves them in no loss, it would seem to result that the issue of a similar amount for goods or obligations of an equivalent value would be complete gain. The Bank, therefore, when it creates a good debt for $10,000 by advancing that amount in notes to its customer will appear to have increased its assets by $10.000 without adding to its liabilities; similarly, when with the same sum it buys a £100 gold bond or the equivalent amount of bullion. It follows that it makes no difference to the financial position of the bank whether in exchange for a good note it receives a good note or a bad note. I should have thought this result, in the language of one of your Lordships " manifestly impossible " : but rules of law have to be tested in these days, and must survive the application of first principles.

A Bank note is a promissory note issued by a Bank payable on demand. The English note contains the promise on the face. The Portuguese note does not, but there is competent evidence in this case that the note has the same effect. So far the banker issuing his note incurs precisely the same liability as a merchant issuing his note. If either fails to pay he is liable for the face value of the note. One Bank becomes alone entitled to issue notes; and let us assume that they have become currency so that they can be tendered in discharge of a debt: the position of the Bank remains the same- It is liable on its note. If its note is payable in gold then to a claim on a note the Bank must pay in gold : otherwise on debts in general the Bank as well as private traders will pay in currency: and as I have said on default will be liable to judgment for the face value. In any civilised State it will not be permitted to issue notes to an unlimited amount: it will, if honestly conducted in any case determine its obligations by its possible resources: but the State will require that behind the promises to pay there stand solid resources in the form of gold and liquid securities: and will impose a positive restriction on the issue of notes beyond an amount which it considers necessary. But this has no bearing on the liability of the Bank to pay the face value of a note when issued.' Now let us assume that the State alters the law by decreeing that the Bank notes need no longer be paid in gold. While that decree lasts the notes are inconvertible, the currency is in the ordinary sense a paper currency. This happened in Portugal in 1891 by a moratorium directed to payment in gold which has been continued in Portugal ever since. The position has not altered. The merchant is in precisely the same position as before : he must pay in currency which will as before be notes but now inconvertible notes. If he fails to pay he can be sued for the face value of his promissory note. The Bank is for the first time put in the same position as the merchant: it is bound to pay on its note: but it need only pay its note in currency, i.e., in its own notes: and if it will not or can not so pay, it can be sued for the face value of the note. Mr. Simonds for Messrs. Waterlow produced an analysis of the obligation of the Bank in issuing an inconvertible note with which in substance I agree. It is 1. to pay in other notes, 2. when there is a return to gold to pay in the decreed amount of gold, 3. if other currency is decreed to pay in that other currency. But how this helps him it is difficult to see : for on examination it will be found that the obligation of a trader on his note is precisely the same, except that 2. will probably only be to pay in notes convertible into gold instead of paying in gold itself. Now in the case of a private trader it appears to be conceded that his loss in similar circumstances would be measured by face value. On this analysis the obligation of the Bank would appear to be the same. That it meets its obligation on its note by issuing a further note seems to have no effect upon the nature or amount of the original obligation : the original obligation is met by a renewal, the Bank have only gained time, not increased or decreased an obligation which would be measured just as before. They have in fact done exactly what the merchant has done; they have paid in currency; and their obligation is measured in the same way. If they had an unrestricted right of issuing notes their obligation would not be altered: they would still be liable to be sued on default for the face value of the note, but the effect of the unrestricted power would presumably be that the face value of the note would have a much lower exchange value than if there were a restricted power : so that the Bank would either have received little value originally or the holder of the note would intermediately have suffered loss on the diminution of the note value. But in fact in the ordinary course of civilised government, as in Portugal, restrictions still continue. In the present case in 1925 the issue of notes by the Bank for commercial purposes was restricted to $195,000,000 of which they had issued $64,000,000. leaving a power to issue of $131,000,000. In addition, the State from time to time had authorised the Bank to issue notes for State purposes supporting these notes by a borrowing from the the Bank secured by State marketable bonds. Restrictions as to proportions of gold and securities reserves still continued in existence so far at any rate as the issue for commercial purposes was concerned. Let us assume, as might well have happened, that the forged issue instead of amounting to $100,000,000 had amounted to $131,000,000 If the Bank had taken the same action they would have issued promissory notes to the full extent of their legal power.

When sued on the notes so issued in exchange for the forged notes they could not have issued their notes in payment; they could have been sued for $131,000,000 and judgment must have gone against them for that sum. Of course, this never would have been permitted by the State, but ex post facto relief has nothing to do with the question of legal obligation. I therefore find the position to be that the Bank by issuing its note like the trader issues its promise to pay a fixed sum; issues a bit of its credit to that amount; like the trader, it is bound to pay the, face value in currency; like the trader it is liable on default to judgment for the face value exigible out of its assets; and, like the trader, if it is compelled by the wrong of another to incur that liability, its damages are measured by the liability it has incurred.

It may be noted that this liability to pay the face value is not in the least affected, as has been suggested, by the question of convertibility. Whether the obligation is to pay in gold or in paper, the liability remains the same to pay 500 escudos, and a judgment on the note would be for precisely the same sum. The exchange value and the face value are quite different matters. 500 escudos in gold will exchange for many more goods and much more foreign currency than 500 escudos in paper; as Messrs. Waterlows would have found to their cost, if they had printed these notes when they were convertible into gold. The damages then claimed would have been twenty million pounds sterling instead of a million. Another way of illustrating the position seems to be this. If a person is wrongfully induced to part with a valuable thing, whether it be goods or choses in action, his measure of damages is the value of the thing at the time he parted with it. The cost of replacement does not enter into the measure of damages at all. If a. man is fraudulently induced to part with 500 standards of timber he recovers the value at the time; it is quite immaterial that he could have replaced the timber, say, from the Russian market, at a small portion of the value. If he manufactures for 1d. articles which can sell for 6d. the measure of damages against the wrong-doer is 6d. not 1d. So if he was by fraud induced to promise to deliver 500 of the 6d. articles so that the contract could be enforced by an innocent holder of the contract it appears to me that on well- established authority the damages would be £12 10s. not £2 1s. 8d. This means that whether he parts with goods or parts with an obligation, the measure of damages is the market value of what he parts with, which means what it will exchange for; and this necessarily means in the case of an obligation expressed in currency of the country the face value of the obligation. If he incurs an obligation to pay pounds sterling, you do not inquire at what cost he will acquire the pounds sterling necessary to fulfil the obligation; he may get them by getting some one to produce an article at much less cost which he can sell for the equivalent sterling; he may get them from abenevolent uncle or from someone who for a small premium has undertaken to make good his loss. Whatever the liability incurred, the measure of damages is market value, which in the case of an obligation to pay. currency is face value. Some confusion has been introduced into the discussion by considering the question as though the Bank had " lost " the bank-notes. If the notes had been " lost " before the Bank had made them the Bank's contractual obligation by delivery the proposition of the Defendants would be correct. The notes insuch a case are nothing but a collection of bill stamps completed but not delivered; to destroy them would but have the same result as burping a man's cheque-book whether the cheques ,were filled up and signed or not. I doubt myself whether Reason 16 of the Bank's case ever meant to contend anything so unsound as is suggested; it was probably meant to be read together with the rest of the reasons. But I am quite satisfied that such a fallacy never entered into the head of such an experienced lawyer as Wright, J. Throughout his judgment he is speaking of the liability of the Bank on the notes, and he finishes his judgment on this point by these words: They say they were damaged by having to assume liability on these notes without getting anything in return. I think this argument is correct, and I think these notes must be taken for this purpose at their face value just as they would be if they had been issued by some other institution that is not a bank of issue. I have already stated my grounds for believing this statement to be correct. For my part I cannot see the way to decide this case for Messrs. Waterlow without reversing a number of authorities which have governed our commercial law as 1 understand it from earliest times.

There is one final and conclusive proof of the fallacy of the Defendants' contention to which I have not yet heard any answer. By issuing a note the Bank provide the holder of it with a piece of currency which he can bring to the bank the next day and compel the bank to receive in discharge of his overdraft or in payment under a contract to buy securities or bullion. By issuing 100 million escudos in notes they provide the public with the means of coming to the bank and depriving it of 100 millions' worth of assets in debts, securities and gold. I say debts, for even Messrs. Waterlow's contention does not suggest that a debt payable in paper currency is worth nothing, or that if the debtor is solvent it is not worth its face value. If the bank releases a debt of 500 escudos it loses 500 escudos. If it parts with 500 escudos' worth of gold it loses 500 escudos: but if it issues for nothing a 500  or the 500 escudos' worth of gold is bought and paid for it loses nothing. I refuse to proclaim to business men in this country or abroad that our law is so unreasonable. It is with respect no answer to say that when the note is returned it can be used again for value. In fact, strictly speaking, it is not available : the note when returned is discharged, and the reissue of it creates a fresh obligation : but the answer to that suggestion is that notes issued for value can also, when returned, be reissued : so that the contention again amounts to this, that - note + value = - note, a proposition which I do not wish to qualify with an epithet.

On the general question as to the number of notes in respect of which damages are to be claimed which turns upon the day upon which it could be said that the bank no longer reasonably could continue to pay good notes for bad, I agree entirely with the view expressed by Scrutton L.J. I put the question in that form, for it was conceded at the bar that at any rate there were some days at the beginning in which the bank's action was reasonable and was the natural result of the Defendant's default. Without such a concession I think the views expressed by all the judges below correct on this point. The majority of the Court of Appeal limited the damages by fixing on December 10th as the day upon which the Bank could have obtained full information if they had acted reasonably. I cannot agree with this. It seems to me disproved by the fact that Messrs. Waterlow though on December 9th they had reason to suspect the Marang transaction did not in fact give the necessary information on that day or the 10th, though they were in fact writing to the Bank on that day; in fact, they never imparted the relevant information at all except in a deposition to the Police Magistrate. I also think that the trial judge with whose admirable judgment I agree on almost every other point took too early a date for closing the transaction. It seems to me that once the exchange began it had to continue until the end of the period fixed by the Bank in conjunction with the Government, which is December 26. On the whole I think that notes exchanged after that date must be treated as benevolences by the Bank.

It only remains to consider how far the damages are to be reduced by the sum recovered from the actual conspirators, a sum of about £400,000. Mr. Justice Wright has apportioned this sum over the total loss of the bank thus reducing proportionately so much of the total loss as has been recovered from Messrs. Waterlow. This seems to me to be incorrect in principle. The Bank's claim against Messrs. Waterlow would be say £1,000,000, but they cannot recover more from the Defendants than their nett. total loss. This is to be ascertained by taking the total amount of their loss not merely that part of it which is recoverable from Messrs. Waterlow, and deducting from the total the amount recovered elsewhere. This is the principle laid down in The Blackcock 1900. P. 1, where a ship was injured by the negligence of both tug and tow. The owners recovered judgment for the full amount of the damage from the tow, but only obtained a sum of £850 from the proceeds of the judgment: they then proceeded against the tug and it was found that both were to blame; the Plaintiffs therefore were only entitled to half their damage, about £2,000. But it was held that the Defendant was not entitled to credit for either the whole or a proportionate part of the £850, for the two sums together did not make up the total loss. The decision seems to fit this case exactly and I think is rightly decided.

The result is that the Banks total loss on 209,718 false escudo notes paid by the Bank at the agreed rate of exchange is ... … £1,092,281 To this must be added the cost of the genuine notes printed by Waterlows and rendered

valueless ... ... ... ... ... ... ... 6,541

1,098,822

The total amount recovered from the con-

spirators is agreed at ... ... ... ... ... 488,430

The Bank's nett loss is therefore ... ... ... £610,392

The actual notes paid up to December 26 exceed 200,000, so that the total claim against the Defendants without any credit far exceeds £610,392. The result is, after being given credit against the total loss suffered by the Bank, the Plaintiffs are entitled to judgment for £610,392. In my opinion, therefore, the appeal of the Bank should be allowed, and the judgment of the Court of Appeal should be set aside, the judgment directed by Mr. Justice Wright to be entered for the plaintiffs should be varied by increasing the sum there mentioned to £610,392, and the Plaintiffs should have the costs here and in both courts below. The appeal of the Defendants should be dismissed with costs here and in the Court of Appeal.

Lord Russell of Killowen.

MY LORDS,

Both in the Court of Appeal and in this House, Waterlows admitted that their contract with the Bank of Portugal contained an implied term that they would not print or deliver Bank of Portugal bank notes without the authority of that Bank, that in printing and delivering the notes to Marang they had committed a breach of that term, and that they were liable to the Bank in damages for that breach. The case was still further narrowed here, because the Bank based their claim to damages solely upon breach of contract. The arguments related only to the amount of such damages; other matters which have at one time figured in the case, such as conversion, negligence and passing off, may be disregarded.

The case divides itself into two very distinct branches, viz., 1°, consideration of the question whether the Bank have proved that Waterlow's breach of contract has caused them damage beyond a certain sum of £8,922; and 2°, consideration of the conduct of the Bank in treating Marang notes as if they were authorised notes, particularly in relation to the question whether any date can be fixed on or after which the Bank could no longer so act at the expense of Waterlows.

The sum of £8,922 above mentioned represents the cost of printing (a) the genuine notes which were withdrawn from circulation and (6) the notes which were given in exchange for Marang notes. This damage, it is admitted, the Bank suffered. To that extent damage, as a result of Waterlows' breach of contract, was proved.

I will start with the first branch, which raises a problem both novel and difficult.

The Bank's claim is simply this:—That having given 209,718 good notes in exchange for mere bits of paper, they have lost the face value of each note so given in exchange. The loss of 500 escudos is, according to the Bank, the inevitable consequence of the gift of the note. The language in which this loss is expressed varies at times. In paragraph 31 of the Bank's case here it is stated that :

The Bank claim the value of the escudos which they had to part with for nothing." In paragraph 39 they say:— The Bank paid out 104,859,000 escudos in exchange for unauthorised notes.

At . . . . the then rate of exchange the sterling equivalent of this sum is £1,092,281." They treat the matter as though being the owners of assets worth over a million sterling, they had parted with those assets (or had incurred an immediate liability to part with assets of that value) receiving nothing in return. Therefore they claim that they did in December, 1925, suffer, and have now suffered, damage to that amount.

Wright J. accepted this view. As I read his judgment he treated bank notes while in the hands of the Bank as of the same value as in the hands of any other person, and held that the Bank therefore lost that value when they issued a note in exchange for a Marang note. The pith of his judgment upon this point is contained in five lines in which he says :—-" They say they are damaged " by having to assume liability on those notes without getting anything in return. I think this argument is correct, and I think these notes must be taken for this purpose at their face value just as they would be if they had been issued by some other institution that is not a Bank of issue." Those five lines are the basis of his judgment on this head, and are re-echoed in the 16th reason of the Bank's case here, viz., " Because the Bank's notes being the currency of the country have the same value in their hands as in those of third parties.

Greer L.J. says:—" Every time they issued good notes to the value of 500 escudos in place of worthless notes, they lost the market value of 500 escudos." In another passage he phrases it thus:—" In my judgment the Bank are entitled to say to the Defendants, ' By your wrong I lost a certain number of escudos worth X pounds, give them back to me in English money at the rate of exchange at the date of my loss.' " And, the Lord Justice makes this additional statement:—" If mypurse' containing £5 is stolen I do not recoup my loss because I have an unused balance in my bank out of which I can draw by cheque another £5. The damage I have suffered is still £5, not merely the 2d. I have to pay for the cheque form." Here again is Reason No. 16.

Slesser L.J. seems to rest his judgment on the question whether the Bank had established damage beyond cost of printing, upon a two fold basis. His language is as follows :— ' Now in the case of the issue to cover the exchange of the Marang notes, the Bank received nothing in respect of this issue. To all intents and purposes it gave away 209,01)0 odd notes, worth on the exchange about £5 each, receiving nothing in exchange; and I cannot see in these circumstances—the notes of Portugal being currency within that country and exchangeable as we are told at 96 escudos to the £ in London—why the Bank cannot say that by| being compelled -to issue this currency for no value, and thus proportionately to deplete their further power to issue, they have suffered damage to the extent of this value of the notes.

All three judgments are founded upon this view:—That the Bank in December, 1925, suffered damage to the extent of over a million pounds sterling, by having in that month paid away 104,859,000 escudos.

If this view correctly represents the position, then the Bank would on the giving of each good note in exchange for a bad note become in fact poorer by the face value of the good note, and there could be no doubt that damage to that amount had been sustained by the Bank. But in my opinion this view does not represent the facts, but overlooks the exceptional situation which arises when a Bank of issue issues notes constituting an inconvertible currency. It is necessary to state a few facts as they existed in December, 1925, in order to appreciate the situation at that time. The Bank were a Portuguese Joint Stock Company which acted as Bankers to the Portuguese Government, and which ever since 1887 had enjoyed an exclusive license to issue their own notes as the only legal currency in Portugal. The capital of the Bank was 13,500,000 escudos in fully paid shares with limited liability. There were two species of issue and of notes in circulation, viz., one destined for the banking operations of the Bank, the other applied as loans to the Treasury. The limit of the right of issue for banking operations was between 195 and 196 million escudos; notes for this purpose had in fact been issued to an amount between 64 and 65 million escudos. leaving an unexhausted power of issue to an amount of about 131 million escudos. Notes issued on Government account amounted to 1,640 million escudos, so that the total issue of authorised notes amounted in December, 1925, to a face value of 1,704 million escudos or thereabouts. The loans to the Government bore interest only at 1 per cent, per annum of which 5/8ths fell to a sinking fund. None of the Bank's notes were payable or redeemable in gold or silver. A period of inconvertibility had been established in 1891 and was still continuing with no likelihood of its ever being determined. The only liability of the Bank, so far as concerns paying or redeeming a note when presented at the Bank, was to give in exchange for it another note or notes of equivalent face value. Each note when issued by the Bank became in the hands of the holder legal tender, and any such note if paid to the Bank by a debtor to the Bank must be accepted by the Bank in discharge pro tanto of the debt.

That being the condition of affairs, when the Bank gave a good unissued note in exchange for a Marang note did they become poorer to the amount of 500 escudos either by parting with 500 eseudos or by incurring an immediate liability to part with

500 escudos That appears to me to be the crucial question : and the answer seems to me to depend upon a correct appreciation of what happened when the Bank issued the good note to the holder of a Marang note, and a correct statement of the obligations which the Bank assumed by the issue of that good note.

As already pointed out, Wright J. and Greer and Slesser L.J.J. were of opinion that the Bank in issuing the note were parting with 500 escudos. It is true that Wright J. also refers to the Bank assuming a liability in issuing the note, but I think he bases his judgment on the former view for he expressly treats the case as if it were just the same as a case where a bank has been deprived of a note issued by some other authority.

In my opinion the Bank parted with no escudos. They issued something which in the hands of the recipient was currency of Portugal and legal tender for payment of indebtedness up to 500 escudos, the form of that currency being, not any metal or other substance of value, but a piece of paper by virtue of which an obligation was incurred by the Bank to the holder thereof. While that something was in the possession of the Bank it could have no value assigned to it, for an obligation by one to himself is nothing worth. The value attaches to the note when it is issued to the holder; but the value does not quit the Bank, and leave the Bank so much poorer. The value attaches to the note when the Bank issue it, and thereby undertake an obligation to the holder. The Bank are affected not by the parting with anything which they possessed but by the incurring of an obligation.

My Lords, that in my opinion is an accurate statement and a complete statement of what happened when the Bank issued a good note to the holder of a Marang note. If that be so then it must follow that the judgments below cannot stand, in so far as they are based upon the view that the Bank parted with or lost escudos to the amount of the face value of the good notes which were given in exchange for Marang notes. In truth this view was the outcome of the erroneous belief that there was no distinction to be drawn between a note of the Bank of Portugal in the possession of that Bank, and the same note in the possession of another Bank or individual: a belief which in terms emerges in the judgments of Wright J. and Greer L.J. and which underlies the Bank's 16th reason.

This belief is clearly ill founded. This was indeed admitted in your Lordships' House; and the Bank's argument proceeded upon the footing that by reason of the obligation incurred by the Bank in issuing a good note and of the fact that they had received nothing in return, they had necessarily suffered damage to the extent of the face value of the note. I say " necessarily " for the Bank made no attempt to prove this by evidence. It must, if the Bank are to succeed, be a case of the thing speaking for itself. I have to deal with this in some little detail, because it appears to me that with the disappearance of reason 16; there disappeared also the Bank's only basis for claiming the face value of the notes, without giving affirmative evidence of the damage which they had sustained.

What then was the obligation which the Bank incurred?

Mr. Gavin Simonds, in the course of an admirable argument which leaves me much in his debt, defined this obligation with I think complete accuracy. It is threefold, viz. :—1". To give in exchange a note or notes of equivalent face value each carrying a similar obligation. 2°. If and when it is hereafter decreed that the notes are to be redeemed in gold, then on demand such quantity of gold as may be decreed. 3°. If and when it is hereafter decreed that some new form of currency shall be legal tender, and that the Bank's notes are to be paid in such currency, then on demand to pay the proper amount of such currency.

The problem then is to quantify those obligations in terms of money. What is the sum which will compensate the Bank for being forced to undertake those obligations How much worse off is the Bank likely to be by having to fulfil them ?

To say that by having to fulfil them the Bank will necessarily be worse off by the face value of each note given in exchange for a Maraug note seems to me, with all respect to those who think otherwise, manifestly impossible. Such a conclusion should surely be based upon some evidence. Could any evidence hope to establish it For myself I can see no such possibility. The first obligation tarries no loss to the Bank except the cost of providing the new note. The second obligation is so far removed from actuality that both the Courts below treat it as a nominal matter. The third obligation is purely contingent and even hypothetical. But let me again remind the House that even if some appreciable degree of damage could arise to the Bank by the assumption of this threefold obligation, it was incumbent on the Bank to prove it. This task they never attempted.

It was, however, argued that damage had accrued to the Bank in other ways by reason of their having been forced to issue notes, getting nothing in return.

It was said that the Bank had assumed an obligation, getting nothing in return. That is true. It was then said that the value of that obligation was the value of the note in the market, viz., 500 escudos. The same argument assumed another form, viz., that the sum in sterling which the Bank claimed to recover from Waterlows was the exact amount which it would have cost Waterlows at the relevant date to purchase 209,718 notes in order that the Bank's liability thereon might be cancelled. When the value of the obligation is alleged to be value of the note, that can only mean that that is the value to the note-holder of the fulfilment by the Bank of their obligation. It by no means follows that 500 escudos represents the cost to the Bank of that fulfilment. But in assessing damages for a breach of contract the question is not what sum will it cost the defendant to repair his breach, but what loss has the plaintiff sustained by reason of the defendant's breach In many cases, possibly in most cases, the answer to each question, would be the same sum. It would be the same here if Reason No. 16 were true, and if the Bank had really parted with 500 escudos with each note issued in exchange for a Marang note. ;Further, it was argued that in respect of each note so issued the Bank had lost the consideration which they would have received if they had issued the note for the purposes of their banking business. There is no ground for assuming that all or indeed any of the notes would have been issued for this purpose rather than for Government purposes. Assuming, however, this fact in the Bank's favour, this argument as it appears to me adds nothing. It only means that the Bank have assumed a liability without receiving any consideration. The true question still remains; what damage have they suffered by assuming the liability which each issue involves?

Another argument centred in the allegation that each note issued in exchange for a Marang note, being legal currency, could be applied by the holder and must be accepted by the Bank in payment of a debt due to the Bank, although at the time of its issue nothing had been received by the Bank. True; but this consideration will not per se justify the view that the Bank must necessarily be worse off by the face value of every note so issued; for who can say that all or any or how many notes so issued, will be so applied The Bank are affected once and for all by the fact, and only by the fact, that at the moment of issue of the note in exchange for the Marang note they assumed the threefold obligation described above; and we come back always to the same question : What sum represents the damage suffered by the Bank in December, 1925, when they assumed that obligation ?

Finally, it was urged that if and when the Bank went into liquidation, and the assets of the Bank were realised and applied in payment of their creditors, the increased liability assumed in December, 1925, would necessarily occasion a diminution of the surplus (if any) available for the shareholders. This indeed was the argument of Dr. Uhlrich in the witness box. Few events are less likely to happen; but if this event ever did happen as described, and the creditors were paid in full, the shareholders would not necessarily suffer a loss. For according to one theory with the increase of the number of escudos in circulation there follows an automatic decrease in the value of escudos and an automatic increase in the value of assets measured in terms of escudos. But though this argument might be advanced in support of a claim to some damage beyond the cost of printing, it appears to me to be of no assistance towards establishing the Bank's proposition that the measure of their present damages must be the face value of the notes.

When all is said and done the position is this. The Bank- make no claim based on curtailment of their powers of issue, or based on loss of profitable business. They make no claim for damages resulting from the introduction of 209,718 Marang notes into the existing currency of 1,704 million escudos. They make one claim only, viz., that every time they issued a good note in exchange for a Marang note they suffered damage to the extent of 500 escudos. In support of that claim they offered no evidence; they pinned their faith to the proposition contained in the 16th Reason. When that is shown to be false, nothing remains to support their claim.

One of your Lordships in his speech has, in effect, accused those of us who differ from him in this case, of upsetting a number of authorities governing bur commercial law. Personally, I am unconscious of any such assault upon authority. I am only conscious of deciding that the Bank have not proved that they have suffered the enormous damages which they claim to recover from Waterlows. I confess, however, that I derive some consolation from the knowledge that, in this alleged act of violence I am abetted by one whose pre-eminence as a commercial lawyer is both well-established and long established.

Upon this part of the case Iam in agreement with the view expressed by Scrutton L.J., viz., that the judgment of Wright J. should be set aside and judgment entered for the Bank for the sum of £8,922. I would accordingly allow tine appeal of Waterlows and dismiss the Bank's appeal.

A majority of your Lordships, however, think otherwise and are of opinion that the Bank have proved that in issuing a good note in exchange for a Marang note they suffered immediate damage to the amount of 500 escudos. Waterlows upon that footing are prima facie liable to the Bank in the sum of 104,859,000 escudos or (converted into sterling at the appropriate rate and date) £1,092,281. This indeed would appear to be something in the nature of a windfall for the Bank; for the introduction into a total issue of 1,704 million escudos of less than 105 million bastard escudos will have resulted in the Bank recovering a sum amounting to more than seven times their paid up share capital.

There remains the question whether in the circumstances of this case a date can be fixed by reference to which the Bank were not entitled to charge Waterlows with the damage sustained by reason of the exchange of good notes for Marang notes subsequently thereto.

Wright J. fixed such a date as the 16th December, 1925. Greer and Slesser, L.JJ. fixed it as the 9th December, 1925. Scrutton L.J. fixed it as the 26th December, 1925, being the date which by the Bank's public notice, issued in concert with the Government, was fixed as the last day on which Vasco da Gama 500 escudos notes would be exchanged.

Upon this part of the case I do not intend to trouble the House. At this point my dissent comes to an end, and we all find ourselves in agreement with Scrutton L.J.

The circumstances of this case are very exceptional. The forged notes only fail to be real because their printing was unauthorised. They were printed from the Bank's own plates. Long before there was any possibility of detection they had been circulating in large quantities. Numbers of them may have obtained the status of validity by having been received and reissued by the Bank and its numerous branches. There was no possibility of ascertaining which Marang notes had in this way acquired enforceable rights. This feature of reissue strikes me as being of overriding importance.

In these circumstances I am of opinion that it cannot be effectively contended either that the Bank should not (down to and including the 26th December, 1925) have honoured all Marang notes, or that such damages as flowed from that course of action are not damages which fall within the test of Hadley v. Baxendale. and for which Waterlows are liable.

MY LORDS,

There is already on record in the admirable judgment of Wright, J., an adequate account of the fraud perpetrated by Marang and his fellow conspirators on Messrs. Waterlow and Company and the Bank of Portugal. It is therefore unnecessary to detain your Lordships by recounting afresh the dramatic circumstances of a crime for which in the ingenuity and audacity of its conception and execution it would be difficult to find a parallel. The present appeals are concerned with the civil consequences of that crime and in particular with the estimation and attribution of the loss which it has occasioned.

As regards Messrs. Waterlow and Sons, the result of the fraud practised upon them was to cause them, without the authority of the Bank, to print 580,000 Bank of Portugal notes of 500 escudos each of the Vasco da Gama type from the plates which were in their possession as the Bank's printers and to place these unauthorised notes at the disposal of theconspirators. As regards the Bank, the result of the fraud was the debasing of the currency of Portugal, for the validity of which the Bank as the central bank of issue of the country was responsible, by the introduction into it by the conspirators of a large number of these spurious notes.

It was conceded by Messrs. Waterlow and Sons that it was an implied term of the contractual relationship subsisting between the Bank and themselves that they should not print notes from the plates in their possession except on the direct orders of the Bank. As they in fact printed and delivered 580,000 notes to the conspirators without any order from the Bank, there can be no question, and it was indeed frankly admitted by Messrs. Waterlow and Sons, that their action in so doing constituted a breach of their duty to the Bank. For any loss attributable in law to this breach of duty which the Bank can prove that it has suffered Messrs. Waterlow and Sons admit liability. The debate at your Lordships' bar consequently centred round the problem—What loss for which Messrs. Waterlow and Sons are legally responsible has the Bank of Portugalsustained by reason of the unauthorised printing and introduction into the currency of Portugal of the spurious notes in question ?

Now it was admitted that the Bank on discovering that a large number of spurious notes had been surreptitiously introduced into the currency of Portugal was not only entitled but bound in its own and the public interest to adopt remedial measures for the protection of the currency. The step which it took was to publish at once a notice intimating that it had resolved to withdraw from circulation the entire vitiated issue of 500 escudo Vasco da Gama notes in the hands of the public and on their presentation at the head office or branches of the Bank to give other notes in exchange for them. In pursuance of this notification the Bank honoured all the 500 escudo Vasco da Gama notes which were presented to it for exchange, spurious and genuine alike. That the withdrawal of the whole issue was a reasonable and indeed the only practicable step for the Bank to take in order to remedy the situation which had arisen was hardly contested by Messrs. Waterlow and Sons. They directed their criticism rather to the way in which the Bank carried out its policy. In the first place they argued that the Bank acted precipitately and that if it had delayed the announcement of the withdrawal of the notes for a short time the means of discriminating between the spurious and the genuine notes, which admittedly the Bank did not at first possess, would have been available toit and it could have refused to honour the notes ascertained to be spurious. In the next place they argued that if the Bank had at first no alternative but to honour spurious and genuine notes alike by reason of its inability to distinguish between them, it should have ceased to honour the spurious notes whenever it had acquired or could have acquired the means of discrimination. Neither of these criticisms of the Bank's action is in my opinion warranted. The Bank in my view was justified in taking immediate action when it did, for the fact of the existence in the currency of a large number of spurious notes became a matter of public knowledge almost simultaneously with its discovery by the Bank and if a panic was to be averted it was essential to take action at once. I equally think that having properly announced the withdrawal of the notes and its intention to honour all such notes in the hands of the public, it was not possible for the Bank to alter its policy until a reasonable time had been given to the public to effect the exchange. To have honoured the spurious notes so long as it could not tell them from the genuine notes and then to cease to honour them when it acquired or might have acquired the means of discrimination would have created a second panic and such a course of conduct on the part of the Bank would have been, grossly unfair. If the only way to avoid a panic was to honour good and bad notes alike, as I think in the circumstances it was, the Bank's ability to distinguish between them becomes an irrelevant consideration. Moreover the Bank was quite unable to say with regard to any particular spurious note presented to it whether it had not itself unwittingly reissued it into circulation and so become responsible for it.

I confess I am not disposed to regard with much sympathy the criticism which Messrs. Waterlow and Sons have directed at the Bank's action. Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken. On this part of the case I find myself in agreement with the reasoning of Scrutton, L.J. In my opinion the action of the Bank in honouring all notes of the type in question, genuine and spurious alike, between 7th December and 26th December, 1925. was reasonable and justifiable in the circumstances and Messrs. Waterlow andSons ought to be held responsible for whatever loss was occasioned to the Bank by the adoption of that policy. I have taken the 26th of December as the limiting date, for that was the date which the Bank itself fixed and I think that it was proper to specify a time-limit for the presentation and exchange of the notes. In so far as the Bank voluntarily continued to honour notes presented after 26th December I am of opinion that it should not be allowed to lay the cost of doing so to the charge of Messrs. Waterlow and Sons.

The problem thus now narrows itself to the ascertainment of the loss which the Bank incurred by reason of its having honoured spurious 500 escudo notes of the Vasco da Gama type between 7th December and 26th December, 1925.

In all 799,190 of the notes, including both the genuine and the spurious ones, were withdrawn from circulation. This figure includes those withdrawn after 26th December. Of the 799,190 notes it has been ascertained that 209,718 or 26.241 per cent, were spurious. Up to 26th December, the total number withdrawn was 791,533. If the percentage of 26.241 be applied to this figure the result is that between 7th December and 26th December 207,706 may be taken as the number of spurious notes which the Bank honoured between these dates. Consequently the loss which the Bank is entitled to attribute to Messrs. Waterlow and Sons' breach of contract is the loss which it incurred by issuing good notes in exchange for 207,706 spurious notes. That is the measure in law of the liability of Messrs. Waterlow and Sons to the Bank.

The problem of assessing this loss necessitates an excursion into the controversial region of banking finance. What the Bank actually did was to give good and valid notes in exchange for entirely worthless notes. What loss did this occasion to the Bank On the one hand it is submitted that all that the Bank lost was the negligible cost in paper and printing of the good notes which it gave in exchange for the spurious notes. On the other hand it is submitted that the Bank lost the full face value of these good notes so given in exchange.

Your Lordships were presented with a choice between these two extremes. No possible middle course was suggested. Which is right? If neither were held to be right the action would have to be dismissed, for neither evidence nor argument was adduced in support of any alternative other than the two I have stated.

The argument which was presented with admirable lucidity and much cogency by Mr. Gavin Simonds on behalf of Messrs. Waterlow and Sons and which prevailed with Scrutton L.J. in the Court of Appeal and has also prevailed with two of your Lordships, is certainly attractive. The Bank of Portugal, so runs the argument, is a bank of issue, that is to say, it can create and issue notes at its discretion up to the maximum which the law of Portugal, embodied in appropriate ordinances, permits. It costs the Bank nothing to create and issue its notes beyond the cost of the paper and printing. True, when the Bank issues one of its notes it incurs an obligation to the holder of it. But inasmuch as the paper currency of Portugal is not convertible, or. in other words, does not entitle the holder to claim payment of its face value from the Bank in gold at a fixed rate, the only obligation which the Bank incurs when it issues a note is to give on demand another note in exchange for it. Thus the Bank can always honour its obligation to the holders of its notes at the trivial cost of printing new notes. A promissory note which is perpetually renewable has theoretically no value because it is never payable. The Bank has consequently only sacrificed some stationery.

In my opinion this argument is fallacious. It overlooks the cardinal fact that a note when issued by the Bank of Portugal becomes by the mere fact of its issue legal tender for the sum which it bears on its face. The issued note represents so much purchasing power in terms of commodities. It can be used by the holder of it to purchase at current prices any commodity, in the market, including gold and securities. It can equally be used by the Bank to purchase commodities, including gold and securities, or to discharge debts due by it. It must be accepted by the Bank in discharge of debts due to it. All this is quite irrespective of the convertibility of the note. With all respect to the contrary view it is in my opinion quite an irrelevant circumstance for the present purpose that the holder of a Bank of Portugal note is not entitled to demand for it from the Bank a fixed amount of gold. Gold after all is only a medium of exchange. Its special importance as such arises from its universal acceptability and the stability of its value. A bank of issue which undertakes to pay its notes in gold undertakes to give in exchange for them a commodity of universally recognised value and therefore a paper currency backed by gold possesses a high value in exchange; it is in effect as good as gold. On the other hand a paper currency which the bank issuing it does not undertake to pay in gold has necessarily a lower value in exchange; its purchasing power is not measurable in terms of a universally accepted standard, but depends on the credit of the issuing bank. In the present case the low value in exchange of the 500 escudo note of the Bank of Portugal reflects its inconvertibility; its purchasing power is correspondingly diminished. The Bank gets less value for the notes which it issues than it would get if they were convertible in gold.

In the course of the debate Mr. Simonds in answer to a question from me admitted that if the notes of the Bank had been payable in gold the liability of his clients would have been measurable in terms of their face value. This admission in my view was really inconsistent with his argument which, whether it be well founded or not, seems to me to be unaffected by the convertibility or inconvertibility of the notes. Whether its notes are convertible or not a bank of issue in issuing them incurs only the cost of paper and printing; the difference consists in the purchasing power which they represent according as they are the equivalent of so much gold, i.e., of a universally acceptable medium of exchange, or only of so much of the bank's credit, a particular medium of exchange whose value may vary between being as good as goldor as worthless as dross. If the notes of the Bank of Portugal had been convertible the liability of Messrs. Waterlow and Sons would have been for the value of convertible notes, i.e., for notes of a higher exchange value, instead of for the value of inconvertible notes, i.e., for notes of a lower exchange value.

Much stress was laid by Messrs. Waterlow and Sons on the fact that in the Bank's own hands its notes were mere chattels possessing only the value of the paper and printing and that if by a fire in its premises its whole stock of notes were burnt it would lose no more than their chattel value, whereas if the Bank's notes were destroyed by fire while in the possession of a member of the public a loss represented by their face value would be incurred. That is true, but the argument disregards again the value of the note issuing power of the Bank which enables it to confer on the paper which it issues the quality of legal tender, the quality of possessing purchasing power to the amount indicated on its face. The Bank only issues notes in exchange for value and the value of its notes in turn reflects the value which it receives in exchange for them.

Herein lies the answer to the point advanced on behalf of Messrs. Waterlow andSons that inasmuch as the Bank issues the bulk of its notes on the call of the Government on unremunerative terms it cannot be said that the Bank if it had itself issued the spurious notes would necessarily have received full value for them; they might have been included in an unremunerative issue to the Government. The answer, it seems to me, is that the circumstance that a large number of its notes are issued to the Government in exchange for Government paper on unremunerative terms has for its result that the assets on which the paper currency of Portugal is based are by so much the less valuable as a basis of credit and that the currency has a correspondingly less value in exchange. Messrs. Waterlow and Sons get the benefit in the depreciated value of the escudos they have to pay.

It remains to notice an ingenious argument that the only effect of the increase of the currency of Portugalby the introduction of the spurious notes was to diminish the value of each unit of the currency and so to increase correspondingly the value in terms of that currency of all the assets in the country. Thus any loss occasioned to the Bank by the introduction of the spurious notes would be compensated by an equivalent appreciation of its assets. This is said to be the result of what is known as the quantity theory of money. I am not concerned to discuss the validity of this theory. I should doubt if it is applicable in the case of a surreptitious dose of excess notes and where, as here, the excess notes as soon as their existence was known were at once withdrawn, but in any case it is sufficient for the present purpose to point out that there is no evidence of any depreciation of the currency having occurred in consequence of the introduction of the spurious notes and no evidence of the Bank having been compensated for issuing gratuitously over two hundred thousand of its notes by an equivalent appreciation of its assets. This argument, it may be remarked, would appear to be equally applicable in the case of a convertible currency.

On the whole matter accordingly I reach the conclusion that the Bank being compelled to issue for nothing notes for which if it had issued them in ordinary course it would have received value corresponding to the purchasing power of the number of escudos which they represented, has suffered loss to the extent of the face value of these notes.

I now proceed to work out the practical result. The spurious notes honoured by the Bank between 7th and 26th December amounted to 207,706, which at 500 escudos each gives a total of 103,853,000 escudos, equivalent, at 96 escudos to the pound sterling, being the agreed current rate of exchange at the time, to £1,081,802. To this must be added £6,541, being the cost of the genuine notes rendered useless by their withdrawal from circulation, bringing out the total liability of Messrs. Waterlow and Sons at £1,088,343. The Bank agreed that a claim of £2,381 which it had originally made for the cost of the good notes given in exchange for the spurious ones and which Wright J. took into account could not receive effect if the Bank was awarded the value of the spurious notes. For the sum of £1,088,343 the Bank would accordingly be entitled to judgment, were it not for the fact that it has already received from the liquidators of the Banco Angola e Metropole, the organisation set up by the conspirators for the purpose of utilising the spurious notes, a sum equivalent to £413,430 and have also estimated that they will receive from this source a further sum of £75,000, making in all £488,430. A question has been raised as to the manner in which credit should be given for this sum. There are various ways in which it may be treated. (1) It may simply be deducted from the sum of £1,088,34.3 for which Messrs. Water-low and Sons are liable, leaving £599,913 as the sum for which judgment should be pronounced; (2) inasmuch as the Bank's total loss (apart from the cost of printing notes) amounted to £1,092,281, being the sterling equivalent of 209,718 spurious notes, and as the £488,430 represents a partial recovery against this sum, a proportion of the £488,430 in the ratio of 207,706 (being the number of spurious notes in respect of which Messrs. Waterlow and Sons have been found liable) to 209,718 (being the total number of spurious notes honoured), or in other words 99.04 of the £488,430 or £483,741 should be deducted from the sum of £1,088,343, leaving £604,602 as the sum for which judgment should be pronounced; or (3) the sum of £488,430 should be deducted from the Bank's total loss of £1,098,822 (being the loss on 209,718 spurious notes plus the cost of genuine notes rendered useless) leaving £610,392 and as this sum is well within the total sum of £1,088,343 for which Messrs. Waterlow and Sons are liable, judgment should be pronounced for £610,392. Messrs. Waterlow and Sons contend for the first method, Wright J. adopted the second, and the Bank contend for the third, quoting in support The Morgengry and the Blackcock [1900] P. 1. The differences in result are relatively unimportant in view of the magnitude of the sums involved and I have found the question a troublesome one, but I have come to the conclusion that the third method is the right one. Having recovered part of their total loss from the perpetrators of the fraud and having established liability for more than the balance of their total loss against Messrs. Waterlow and Sons the Bank is in my view entitled to avail themselves of Messrs. Waterlow and Sons' liability up to the extent of the balance of their total loss and so to secure from the combined sources complete indemnity.

In parting from the case I cannot refrain from observing that the fact that a sum of nearly half a million pounds has been recovered by the Bank from the conspirators gives occasion for a comment on the leading contention of Messrs. Waterlow and Sons that the Bank lost nothing by issuing its good notes in exchange for spurious ones. The conspirators constituted themselves an illegal bank of issue for the spurious notes which cost them nothing but the cost of paper and printing, yet they seem to have made half a million sterling, and probably much more, by the issue of these notes. Why, it occurs to me to ask, should it be said that the Bank would not equally have received value in return if it had issued a corresponding number of genuine notes in ordinary course and that it has been deprived of nothing by having had to issue them gratuitously?

I am accordingly in favour of dismissing Messrs. Waterlow and Sons' appeal, allowing the Bank's appeal and directing judgment to be pronounced against Messrs. Waterlow andSons for the sum of £610.392.


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