Scottish Court of Session Decisions

The reclaiming motion called before the Second Division, comprising the Lord Justice-Clerk (Ross), Lord Morison and Lord Caplan for a hearing on 4 and 5 October 1994. On 5 October 1994 their Lordships made avizandum.

At advising, on 28 October 1994 —

LORD JUSTICE-CLERK (Ross)—In this action the pursuers are seeking payment from the defenders of the sum of £515,793.95 which the pursuers claim is due to them in terms of a bank draft (or bankers' draft) issued by the defenders in favour of the pursuers as payees. When the pursuers presented the bank draft for payment, the defenders refused to make payment. It is averred by the pursuers that their understanding is that payment was refused because the defenders suspected fraud on the part of some other party. The minuters are a party who claim to have been the victims of fraud or embezzlement on the part of other third parties some time prior to the issue of the bank draft.

In their pleadings the pursuers explain how the bank draft came to be issued by the defenders. As a result of a contract of sale in terms of which a supply of scrap copper was delivered by the pursuers to a company known as James Cosgrove and Sons Ltd, Dundee (hereinafter referred to as ‘Cosgroves’), the pursuers were owed the sum of 717,500 US dollars by Cosgroves. The pursuers took various steps with a view to recovering this sum from Cosgroves. As a result, on or about 11th March 1993 Cosgroves granted and delivered to the pursuers a promissory note for 717,500 US dollars together with interest. As a result of further pressure for payment by the pursuers, Cosgroves granted and delivered to the pursuers a further promissory note dated 1st April 1993 for 50,000 US dollars. On or about 28th June 1993 at a meeting at the offices of the pursuers' solicitors in Dundee, representatives of Cosgroves delivered to the pursuers' solicitors a bank draft issued by the defenders. The pursuers were named as payees in the draft. The draft was for the sum of £515,793.95. It is averred by the pursuers: ‘Cosgroves delivered said draft in order to settle the aforesaid liability to the pursuers with interest and expenses. The pursuers accepted said draft in settlement of Cosgroves' said liabilities and in exchange for the draft the pursuers delivered to Cosgroves said two promissory notes.’

Following upon the refusal of the defenders to make payment to the pursuers on the draft, the pursuers raised the present action for payment. Separate defences were lodged on behalf of both the defenders and the minuters. In their defences, the defenders contend that the issuing of the draft was induced by the fraudulent misrepresentations of a third party, and that the draft was intended by the person requesting it to serve an illegal purpose, namely a fraud on a third party. Similar contentions are advanced in their defences by the minuters. The case was called before the Lord Ordinary in procedure roll, and after hearing parties the Lord Ordinary held that the defences for both the defenders and the minuters were irrelevant, and he accordingly repelled the defences and sustained the first plea in law for the pursuers and granted decree de plano in their favour. Against that interlocutor of the Lord Ordinary both the defenders and the minuters have now reclaimed.

In his opinion the Lord Ordinary records that a number of matters were ultimately agreed between the parties as follows:

‘(1) The pursuers, as the payees named in the bankers' draft issued by the first defenders, were not "holders in due course" within the meaning of the Bills of Exchange Act 1882; (2) this remained the case whether, under sec 5(2) of the Act, the draft was treated as a bill of exchange or as a promissory note; and (3) it followed that, as between the pursuers and first defenders, the ordinary law of contract should be applied. This was the analysis made by Lord Dunpark in Thompson v J Barke and Co (Caterers) Ltd at p 69 and, in general, that analysis was accepted as correct.’

Before this court parties remained in agreement upon these matters. Both parties lodged grounds of appeal in identical terms. They are as follows:

'(1) The Lord Ordinary erred in law in rejecting the argument for the defenders and reclaimers that the payment effected by bankers' draft was illegal as constituting part of a fraudulent scheme, and that accordingly the defenders were entitled to refuse payment of the bankers' draft.

'(2) The Lord Ordinary erred in law in rejecting the argument for the defenders and reclaimers that the defenders were entitled to refuse payment of the bankers' draft on the ground that its issue was induced by the fraud of James Cosgrove and Sons Ltd.

‘(3) The Lord Ordinary should accordingly have allowed a proof before answer.’

Counsel for the defenders and minuters sought to support all these grounds of appeal. In their answers, the defenders and the minuters refer to an action of multiplepoinding at the instance of the defenders which was signeted on 27th August 1993, and the averments made therein are adopted and incorporated within the pleadings of the present action brevitatis causa. It is unnecessary to repeat these averments in this opinion. Suffice it to say that in these pleadings the defenders maintain that the minuters and another party transferred funds to Kyoto International Investment Trust SA being a company incorporated under the laws of the Grand Duchy of Luxembourg. Subsequently on 25th June 1993 funds emanating from Kyoto International Investment Trust SA were credited to each of two accounts held by the defenders in the name of Messrs MacLeod, Paxton Woolard and Co to be held in trust for Cosgroves. Thereafter a number of payments were made from both accounts using bank drafts or inter-account transfers, and these payments are narrated in the condescendence in the action of multiplepoinding. It is also averred in the condescendence that various other banks contacted the defenders indicating concern about some of these drafts, and that some of the drafts had been stopped by the defenders because of their uncertainty as to the true source of and entitlement to the funds paid into the two accounts on 25th June 1993. Counsel for the defenders explained that the defenders believed that Kyoto International Investment Trust SA and Cosgroves had used false representations to induce the minuters and another party to part with funds for investment, and that Kyoto International Investment Trust SA had used the control which it had over these funds to divert the funds into other accounts so as to dissipate the funds in such a way that they could not be traced. The defenders believed that Kyoto International Investment Trust SA and Cosgroves had been indulging in money laundering, and they accordingly contended that the money held by them in the name of Messrs MacLeod, Paxton Woolard and Co was tainted. In particular the defenders maintained that the money which had been credited to the two accounts held with the defenders in name of Messrs MacLeod, Paxton Woolard and Co had been embezzled from the minuters and another party. In these circumstances the defenders and minuters submitted that they were entitled to refuse payment of the bank draft.

In ans 5 for the defenders the matter is put thus: ‘The lodging of the funds in accounts for behoof of James Cosgrove and Sons Ltd and the subsequent dissipation of those funds having been designed to operate as a fraud, the payment of part of the funds to the pursuers would be a payment in furtherance of the fraud, notwithstanding that the pursuers may have been acting in bona fide. Further, in the circumstances the directors of James Cosgrove and Sons Ltd must, when requesting payment of the said bankers' draft out of the funds in the said account, have impliedly represented that they were the true owners of those funds or had the authority of the true owner to use them, and that implied representation must to their knowledge have been false. In the said circumstances the defenders were entitled to refuse payment on the draft, on the ground that (a) it was induced by a fraudulent misrepresentation and (b) it was intended to serve an illegal purpose, namely the perpetration of a fraud.’ Averments to a similar effect appear in ans 5 for the minuters.

As I understand it, the defenders and minuters accepted that there was no reason to conclude that the pursuers were acting other than in good faith and that there was in fact a debt due by Cosgroves to the pursuers. Counsel stressed that this was not a case where payment had been made under a bank draft and the party who was allegedly the true owner of the money then sought to recover it; the present case was unusual in that the fraud had been discovered when the draft was in course of payment.

Although the arguments of parties ranged over a wide area, I do not find it necessary to deal in detail with all the arguments presented. The pursuers' action is based upon the bank draft, and it is necessary first to establish the status of that document. The first point to be made is that the document founded on is a bank draft and not a cheque. ‘Bill of exchange’ is defined in sec 3(1) of the Bills of Exchange Act 1882. Section 3(1) provides as follows: [his Lordship quoted sec 3(1) and continued:]

Section 3(2) emphasises that an instrument which does not comply with the conditions laid down in sec 3(1) is not a bill of exchange. It is plain from the terms of sec 3(1) that for a bill of exchange there must be three parties, namely the drawer, the drawee, and the payee. That being so, it might be thought that a bank draft was not a bill of exchange. However, sec 5 of the Bills of Exchange Act 1882 provides as follows: [his Lordship quoted same and continued:]

Parties were accordingly agreed in the present case that the pursuers were entitled to treat the bank draft as a bill of exchange or a promissory note at their option.

If a bill of exchange is dishonoured by non-payment, the holder has an immediate right of recourse against the drawer (sec 47(2)). So far as promissory notes are concerned the liability of the maker is dealt with in sec 88 of the Bills of Exchange Act 1882. That section provides: [his Lordship quoted same and continued:]

In the present case parties are agreed that the bank draft contained a contractual undertaking by the bank to pay the sum specified therein. That being so, the critical question is whether in the circumstances the defenders are entitled to refuse payment under that contractual obligation because they suspect fraud on the part of a third party. I agree with counsel for the pursuers that prima facie the defenders must be liable by virtue of the obligation contained in the bank draft. However, the defenders have stated two defences in their pleadings, and it is necessary to consider whether these defences are relevant. The first defence stated is that contained in ground 2 of the grounds of appeal, namely, that the defenders were entitled to refuse payment on the ground that the issue of the bankers' draft was induced by the fraud of Cosgroves. This raises the question of whether the defenders are entitled to avoid liability by pleading fraud on the part of a third party to the contract. As the Lord Ordinary recognised, the general rule is that the fraud of a third party does not give ground for avoidance of the contract by one of the contracting parties. The general rule that error induced by the fraud of a third party does not constitute a ground for avoiding the contract is well vouched by Gloag on Contract (2nd edn), p 441 and Young v Clydesdale Bank and North of Scotland Bank v Mackenzie.

Counsel for the defenders conceded before this court, as he had before the Lord Ordinary, that the general principle of Scots law was that error induced by the fraud of a third party left a contractual relationship unaffected. However, he submitted that there was an exception to that rule where the contract in question involved a negotiable instrument. He cited no direct authority for such a proposition, but relied on two cases, one English and one Scottish. However, not only is there no direct authority for the exception for which counsel contended, but there is an obiter dictum against it. In Thompson v J Barke & Co (Caterers) Ltd at p 69 Lord Dunpark said: ‘If the cheque is not per se void, he can sue the drawer for the amount of the cheque, notwithstanding that the cheque may have been drawn in error or impetrated from the drawer by the fraud of a third party; but if the payee accepted the cheque knowing of the error or fraud, he will be personally barred from founding upon it.’

In support of his proposition counsel founded principally on two cases, one in England and one in Scotland, where the court was considering whether an action of repetition was available where money had been paid by cheque as a result of a third party's fraud. The question in the present case arose at a different stage, because far from making payment under the bankers' draft, the bank have refused to do so; but counsel for the pursuers accepted that if the defenders would be entitled to recover payment after the bank draft had been paid, then they should be entitled to state this defence at the earlier stage when payment under the bankers' draft was being demanded by the pursuers. However, he maintained that the two cases relied upon by counsel for the defenders did not support the proposition that third party fraud could in the circumstances found an action of repetition. The two cases upon which counsel founded were R E Jones Ltd v Waring & Gillow Ltd and G M Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd. In both these actions a claim for repayment was made upon the ground that payment had been made under error. Counsel sought to contend that these cases were similar to the present case. The ground upon which recovery was sought in R E Jones Ltd v Waring & Gillow Ltd was that the sum had originally been paid under a mistake of fact (Lord Chancellor, p 679). Likewise in GM Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd, the court allowed a proof before answer upon the view that the first defenders should be given the opportunity of proving that they had made the payment initially in the mistaken belief that they would receive in exchange a trailer supplied by the second defenders.

Counsel for the pursuers, on the other hand, maintained that in both these cases the error founded upon was error as to whether the payee was entitled to the sum in question, that is, whether money was owed to him. He further maintained that the present case was different in that there was no doubt that the pursuers were entitled to payment in respect of the contract of sale between them and Cosgroves.

In my opinion counsel for the pursuers was well founded in the analysis which he made of these cases. In both R E Jones Ltd v Waring & Gillow Ltd and G M Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd the error founded upon was whether there had been mistaken belief that money was owed at all to the party claiming it. In the present case it is plainly averred that Cosgroves were due the pursuers money in return for scrap copper supplied to them under a contract of sale. Although these averments are not admitted, parties before us did not dispute that that was so, and we were invited to determine this case upon that basis. The defenders are not seeking to avoid payment under the draft upon the view that the pursuers are not entitled to payment but upon the view that the defenders were in error as to the source of the funds credited by them to the two accounts on 25th June 1993. This is not a case where the defenders are alleging that they granted the bank draft under the mistaken belief that money was due to the pursuers. If that were the position then the case might be similar to R E Jones Ltd v Waring & Gillow Ltd and G M Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd. The only error which is put forward by the defenders in the present case is that the defenders were induced by Cosgroves to believe that they were the true owners of funds held by the defenders and that they fraudulently misrepresented to the defenders that these funds would be available to the defenders if they granted a bank draft in favour of the pursuers. It appears to me that any error founded upon by the defenders was as to a collateral matter; there was, however, no error in relation to the bank draft such as would entitle the bank to claim repetition if payment had been made in terms of the bank draft.

In support of his submissions on misrepresentation, counsel for the defenders founded upon Barclays Bank v W J Simms Ltd.In my opinion, that case, far from supporting counsel, is contradictory of his argument. At p 695 Goff J (as he then was) under reference to R E Jones Ltd v Waring & Gillow Ltd and other cases said: ‘From this formidable line of authority certain simple principles can, in my judgment, be deduced: (1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. (2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or (c) the payee has changed his position in good faith, or is deemed in law to have done so.’

It appears clear to me that the present case is covered by (2)(b) in that the payment intended to be made by virtue of the bank draft was made for good consideration, and in particular was made to discharge a debt owed to the pursuers by Cosgroves who had authorised the bank to discharge the debt on their behalf in this way.

The other ground upon which the defenders sought to avoid liability was the proposition that the payment to be effected by the bank draft was illegal as constituting part of a fraudulent scheme. Counsel for the defenders maintained that the whole transaction involving the bank draft was tainted because payment effected by the draft and the draft itself were an integral part of a fraudulent scheme involving embezzlement and money laundering.

He submitted that where a payee has obtained title to funds derived from fraud, these funds can be recovered by an action of recompense unless the payee can show that he has been acting in good faith and has given full value. He contended that this was an example of the rule that no one can take profit from a fraud. In support of these propositions he founded upon the Outer House case of M & I Instrument Engineers Ltd v Varsada. He emphasised that the payee must show that he gave full value because if he has not given full value the result must be that he is benefiting from fraud which is objectionable. He also relied upon New Mining and Exploring Syndicate Ltd v Chalmers and Hunter. In particular he founded upon a passage from the opinion of Lord Mackenzie at p 138 where he stated: ‘An onus is put on the defender by the pursuers when they prove that money belonging to them was paid into the bank account — the onus being to show that the firm was not enriched thereby.’

On this aspect of the matter, counsel for the pursuers accepted that the scope of the rule that no one could benefit from fraud meant that gratuitous benefit from fraud could not be retained. However he did not accept that there was any onus on a recipient to prove that he had given full value for funds received.

I accept that the general proposition is that no one can profit from fraud. In Clydesdale Bank v Paul at pp 628-629, Lord Shand quoted a dictum by Lord Chancellor Campbell to the following effect: ‘I consider it to be an established principle that a person cannot avail himself of what has been obtained by the fraud of another, unless he is not only innocent of the fraud, but has given some valuable consideration.’

I am not, however, persuaded that there is an onus on the recipient in every case. In New Mining and Exploring Syndicate Ltd v Chalmers and Hunter, it is easy to understand why Lord Mackenzie concluded that there was an onus on the defender. That was a case where it was established that money had been embezzled by a partner and then paid into the firm's bank account. The situation in the present case is different because the bank draft was issued in order to effect payment to the pursuers of a sum due to them in respect of a genuine contract of sale between them and Cosgroves. I have already remarked that it was accepted that the pursuers were in good faith. Insofar as parties are agreed that there was a genuine contract of sale between the pursuers and Cosgroves, it is plain that there was no question of the payment which was to be made by the bank draft being gratuitous. There is no averment in the answers to the effect that this was a gratuitous obligation, and as already observed, although the pursuers' averments to the effect that the draft was accepted by them in settlement of Cosgroves' liabilities are not admitted, there was no dispute that the draft was issued in respect of a transaction which was genuine. In other words the bank draft was issued by the defenders in order to settle an existing debt, and that makes it plain that the case is very different to New Mining and Exploring Syndicate Ltd v Chalmers and Hunter. It thus seems clear that in the present case there is no question of any lack of good faith, and that it is plain that the bank draft was given for full consideration. In M& I Instrument Engineers Ltd v Varsala, the Lord Ordinary merely sought to apply the law laid down in Clydesdale Bank v Paul and New Mining and Exploring Syndicate Ltd v Chalmers and Hunter.

Counsel for the defenders also sought to support this ground of appeal by contending that the bank draft was struck at by the rule that payment under the bank draft would involve illegality. The broad proposition was that where a contract involves illegality, it cannot be enforced (Boissevain v Weil).

I am not persuaded that the proposition can be stated as broadly as counsel maintained. The case of Boissevain v Weilconcerned an attempt to recover a debt where the transaction was one prohibited by a statutory regulation. As Lord Radcliffe explained in his speech at p 343, the fact that the regulation in question prohibited the borrowing rendered the appellant's claim for repayment unmaintainable. In the present case, however, there is no question of any contract which has been entered into being illegal. On the contrary it is accepted that the contract between the pursuers and Cosgroves was a genuine commercial transaction and not a pactum illicitum.

There is a further reason for rejecting the submission that the payment to be effected by the bank draft constituted part of a fraudulent scheme. In issuing the bank draft, the defenders did not undertake to take money from an account held for behoof of Cosgroves and to transfer it to the pursuers. What the bank did by issuing the bank draft was to undertake to make payment of the sum specified in the draft using the bank's own funds. This is made quite plain in art 3 of the condescendence. It appears that at one stage prior to delivery of the draft, a partner of the pursuers' solicitors communicated with the defenders and stated that he required confirmation that the draft constituted ‘cleared funds’. In ans 3 the defenders explain that the concept of ‘cleared funds’ does not apply to a bank draft which contains a contractual undertaking by the bank to pay the sum specified therein. This means that the transaction involving the bank draft did not involve any of the funds which the defenders maintain were derived from embezzlement or money laundering. On the contrary the bank draft related to the defenders' own funds. The situation might have been different if Cosgroves had issued in favour of the pursuers a cheque drawn on their account with the defenders. But that was not the course which was followed, and what Cosgroves delivered to the pursuers was a bank draft in terms of which the defenders undertook to make payment. This involved use of the defenders' own funds and there was no question of the defenders undertaking to make payment from funds which they held to the account of Cosgroves. Accordingly if payment is now made by the bank in implement of the undertaking in the bank draft, that will not depend on any illegality.

I am of course aware that the defenders are maintaining that they would not have undertaken the obligation under the bank draft but for the fact that they were holding funds in two accounts ostensibly for behoof of Cosgroves. That may well be so, but the funds which the defenders are holding in the two accounts for behoof of Cosgroves will not be used by the defenders in making payment of their obligations under the bank draft.

As already observed, counsel for the defenders accepted that he could not point to any direct authority in support of his propositions in relation to illegality, but he strongly relied upon Thackwell v Barclays Bank plc. In that case Hutchison J dealt inter alia with the defence of ex turpi causa non oritur actio.In that case the plaintiff had taken part in a fraudulent refinancing scheme. The plaintiff's share of the proceeds of the scheme had been paid by cheque; a third party forged the plaintiff's signature on the cheque so that the cheque appeared to have been endorsed by the plaintiff. The cheque was then paid in to a third party's account. The plaintiff brought an action for negligence and conversion against the bank in respect of the cheque. The bank pleaded inter alia that the doctrine of ex turpi causa non oritur actio prevented the plaintiff from recovering because he had been a party to or had had knowledge of the fraudulent refinancing scheme which had caused the cheque to be paid to him in the first instance. On the facts Hutchison J held that the plaintiff was a party to the fraudulent refinancing transaction in the sense that he knew from the outset that it was a fraud and willingly participated in it. He accordingly entered judgment for the defenders. However Hutchison J also proceeded to make certain observations by way of obiter dicta on the basis that even if the plaintiff had been innocent of the fraud, he would still have been unable to recover. At p 689 he explained why the plaintiff could not recover even if he was innocent of the fraud. He stated: ‘This is because I accept the correctness of the arguments advanced by counsel for the defendants and, adopting his approach, it seems to me first that it would indeed be difficult to find a case in which the criminal conduct relied on was more proximate, because, as counsel for the defendants submits, the cheque alleged to have been converted constituted in reality the very proceeds of the fraudulent conduct. I say this notwithstanding that I recognise that it was not Lombard's cheque but the cheque drawn by Alan Jones once he had received Lombard's cheque. If one then considers the second of the suggested tests, everything points in my judgment to a denial, on grounds of public policy, of the right to recover. The underlying crime was a serious one and there is nothing inherently unfair in a result which deprives Mr Thackwell of the proceeds of this cheque. On the contrary, by permitting Mr Thackwell to recover the proceeds of this cheque from the bank I should, as it seems to me, be indirectly assisting in the commission of a crime.’

As the Lord Ordinary observes, what Hutchison J propounded has come to be known in England as ‘the public conscience test’. In his judgment, Hutchison J stated that he accepted the correctness of the arguments advanced by counsel for the defendants, and at p 687 he recorded what counsel for the defendants had said in this connection: ‘That test, he suggested, involved the court looking at the quality of the illegality relied on by the defendant and all the surrounding circumstances, without fine distinctions, and seeking to answer two questions: first, whether there had been illegality of which the court should take notice and, second, whether in all the circumstances it would be an affront to the public conscience if by affording him the relief sought the court was seen to be indirectly assisting or encouraging the plaintiff in his criminal act.’

On its facts Thackwell v Barclays Bank plc was far removed from the present case. As I have already observed, it is not suggested that the pursuers in the present case were acting in bad faith whereas the plaintiff in Thackwell v Barclays Bank had taken part in the fraudulent refinancing scheme. Quite apart from that, I agree with counsel for the pursuers that the reasoning of Hutchison J is not persuasive. In the passage from p 689 which I have quoted, it appears that Hutchison J's opinion is based upon two considerations, namely, that the criminal conduct in question was proximate, and that the party claiming should be denied relief on the grounds of public policy. The argument so far as based upon proximity of the illegal conduct relied on appears to be based on a passage from the speech of Lord Wilberforce in Anns v Merton London Borough at p 751. That does not appear to me to be a satisfactory analogy. In the first place Anns v Merton London Borough was dealing with a claim for economic loss based on tort. That is a very different situation to that which obtained in the present case. Not only that, Anns v Merton London Borough was held by the House of Lords to have been wrongly decided and was departed from in Murphy v Brentwood District Council. Accordingly the basis for Hutchison J's proximity test is plainly unsound.

I am also satisfied that the test based upon public policy is similarly flawed. When counsel for the defenders was dealing with this matter he submitted that it was public policy that criminals should not benefit from frauds. However, he accepted that it was also public policy that commerce should not be impeded, and that instruments such as bank drafts should be upheld. He therefore submitted that a balancing exercise required to be carried out, and he sought to contrast the position of the minuters whom he described as victims of dishonesty with the position of the pursuers who had voluntarily entered into a contract of sale placing trust upon the credit of the party with whom they contracted, namely, Cosgroves. He submitted that if such a balancing exercise were carried out the interests of the minuters as victims should be preferred over the interests of the pursuers who had contracted with Cosgroves and then discovered that there was difficulty in obtaining payment from them. I am not persuaded that that is a correct comparison. In the events which have occurred, the pursuers appear to me to be victims just as much as the minuters. Having agreed to discharge Cosgroves' liabilities in exchange for the bank draft, the pursuers are now faced with the defenders refusing to make payment on the draft upon the ground that prior transactions which the defenders have had with Cosgroves are tainted by fraud. Accordingly I am not satisfied that if it is necessary to carry out this balancing exercise, the minuters' interests should be preferred to those of the pursuers. More importantly, however, I am not persuaded that it is appropriate for such a balancing exercise to be carried out.

Counsel's suggestion that a balancing exercise should be carried out was based upon Thackwell v Barclays Bank plc. It is, however, clear that the House of Lords has not approved of the reasoning of Hutchison J in Thackwell v Barclays Bank plc. The case was considered in Tinsley v Milligan. At p 359 Lord Goff of Chieveley, after referring to the public conscience test approved by Hutchison J, stated: ‘It is to be observed that the test is not stated as a general principle, but as a limited principle under which the court may deny relief in certain specific circumstances, even though the claimant is not implicated in the illegality. Furthermore, the test does not as stated involve any balancing exercise of the kind described by Nicholls LJ in the present case. It is unnecessary for your Lordships' House to consider for present purposes whether the test accepted by Hutchison J is good law or not. I wish only to refer to the fact that of the four cases relied upon as providing support for it, the first (Burns v Edman) was concerned with a claim under the Fatal Accidents Acts founded upon the income from the deceased as a burglar; the second (Murphy v Culhane) was concerned with a claim for damages by the deceased's widow, the deceased having been killed by the defendant during a criminal affray initiated by the deceased; the third (Shelley v Paddock) was concerned with a claim for damages for fraud, where the defendant had swindled the plaintiff out of the price paid by her for property in Spain, the plaintiff having innocently paid the money in breach of the Exchange Control Act 1974; and the fourth (Geismar v Sun Alliance and London Insurance Ltd) was a case in which the plaintiff's claim to an indemnity under a contract of insurance, in respect of the loss of jewellery deliberately imported in breach of the Customs and Excise Act 1952, failed because recovery of such an indemnity would indirectly enable the plaintiff to profit from his deliberate breach of the law. It is by no means easy to see how any broadly applicable public conscience test could be derived from these authorities.’

Lord Goff of Chieveley went on to observe that the principle propounded by Hutchison J had been adopted and expanded in a number of cases by the Court of Appeal. At p 361 Lord Goff of Chieveley added: ‘I feel driven to say that what appears to have happened is that a principle, developed by counsel for the defendant bank in Thackwell v Barclays Bank plc for a limited purpose in the context of a claim in tort, has been allowed to expand, both in its terms and in its range of application, so that it is now suggested that it operates as a broad qualifying principle, modifying and indeed transforming the long established principles applicable in cases of illegality, and in particular in relation to the principle established as applicable in cases such as the present. Furthermore, this development has been allowed to occur without addressing the questions (1) whether the test is consistent with earlier authorities; (2) if it was not so consistent, whether such a development could take place consistently with the doctrine of precedent as applied in the Court of Appeal; or (3) whether the resulting change in the law, if permissible, was desirable. It is unnecessary for your Lordships to decide whether any such test is applicable in the limited context in which it originally emerged before Hutchison J. It is sufficient for present purposes to say, with the greatest respect, that to apply the public conscience test as qualifying the principle established for nearly 200 years as applicable in cases such as the present is, for reasons I have already stated, inconsistent with numerous authorities binding on the Court of Appeal.’

Although Lord Goff of Chievely was dissenting, the passages which I have quoted from his speech obviously met with general approval. Lord Keith agreed with his speech in its entirety; and Lord Browne-Wilkinson stated in the first paragraph of his speech: ‘My Lords, I agree with the speech of my noble and learned friend Lord Goff of Chieveley, that the consequences of being a party to an illegal transaction cannot depend, as the majority in the Court of Appeal held, on such an imponderable factor as the extent to which the public conscience would be affronted by recognising rights created by illegal transactions.’

It is clear from that case that the House of Lords held that a public conscience test had no place in determining the extent to which rights created by illegal transactions should be recognised. I am accordingly satisfied that the argument which counsel for the defenders advanced on the basis of public policy was not a sound one.

The submissions put forward on behalf of the defenders were supported by counsel for the minuters. They adopted the submissions made on behalf of the defenders and also made one or two additional points themselves. Like the defenders, they submitted that a proof before answer should be allowed. Junior counsel for the minuters referred to the pleadings and drew particular attention to the fact that the pursuers' averments to the effect that they had accepted the draft in settlement of Cosgroves' liabilities and had delivered to Cosgroves the two promissory notes in exchange for the draft, were said by both the defenders and the minuters to be ‘Not known and not admitted’. However, I understood senior counsel for the minuters to accept that there was in fact a debt due by Cosgroves to the pursuers, and at the end of the day counsel for all parties made it clear that they wished the court to give its decision on the legal issue raised without regarding the pleadings as restricting their right to do so.

In the course of their submissions counsel for the minuters relied upon Bank für Gemeinwirtschaft Aktiengesellschaft v City of London Garages Ltd. In that case observations were made by the Court of Appeal in relation to bills of exchange on the onus of proof where fraud is alleged. Cairns LJ at p 155 said: ‘It is clear that if fraud is proved the holders have the onus of proving that they, or the previous holders who endorsed them, took the bills in good faith and for value.’

I do not find this case of any assistance because it is plain from the judgments that the decision in the case turned upon the terms of a provision in the Supreme Court Practice (1970), Vol 1, p 133 under the heading ‘Bill of Exchange’.

Both counsel for the defenders and counsel for the minuters stressed that the defenders had reason to believe that money laundering had been taking place, and they emphasised that as a result of the provisions of an EEC directive and domestic legislation banks required now to be more vigilant, and that obligations were imposed on banks to tell the authorities if money laundering or other criminal offences came to their notice. I readily accept that that is the position, but so far as this action is concerned I am satisfied that it falls to be decided upon the basis of the law of contract applicable to Scotland. If the ordinary law of contract is to be modified in cases where money laundering has featured, that is something for which Parliament must provide. Parliament has passed legislation dealing with money laundering in other fields, and I am satisfied that it is for Parliament and not the courts to impose any qualifications to the law of contract on such grounds.

The Lord Ordinary has dealt with the issues raised in this case very fully, and I find myself in complete agreement with all that he has said with one exception. In the course of his opinion the Lord Ordinary distinguishes the cases of R E Jones Ltd v Waring & Gillow Ltd and G M Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd upon the ground that neither of these cases was dealing with the effect of third party fraud on an admitted contract. In this connection he says: ‘In particular, there was no suggestion in either case that there existed any genuine contractual relationship between the drawer and payee of the cheques in question.’

I am satisfied that that is not a good ground for distinguishing these two cases because in fact in both these cases there did exist a genuine contractual relationship between the drawer and payee of the cheques in question just as the bank draft in the present case evidenced a genuine contractual relationship between the pursuers and the first defenders. However, as I have already explained, there are other and better grounds for distinguishing these two cases.

Apart from that, I agree with the Lord Ordinary's reasoning and the result at which he arrived. However in the interlocutor of 30th June 1994, the Lord Ordinary inter alia sustains the pursuers' second plea in law. That plea in law deals with personal bar, and should not have been sustained. In my opinion it is clear that the Lord Ordinary sustained the pursuers' second plea in law per incruiam and that what he intended to do was to sustain the pursuers' third plea in law.

In all the circumstances I would move your Lordships to refuse the reclaiming motion and to adhere to the interlocutor of the Lord Ordinary subject to the necessary correction being made to the interlocutor to show that it is the pursuers' third plea in law which is being sustained.

LORD MORISON —The respondents have pled a prima facie case that they are entitled to payment of the sum sued for by virtue of the obligation undertaken by the defenders and reclaimers (‘the bank’) in a bankers' draft issued to the respondents in which the bank obliged themselves to pay them that sum. The question is whether the bank and the minuters who are also reclaimers have pled a relevant defence to that case. All parties were agreed that the pleadings were not in their final form, but that they wished a decision on the questions of principle raised by the defences. During the hearing of the reclaiming motion I found it at times difficult to follow the exact factual basis upon which the court's determination was sought, and the position of the bank and of the minuters did not appear to be identical. However ultimately my understanding of the factual basis accepted by all parties for the purpose of the hearing was as follows.

The bankers' draft was offered to and accepted by the respondents in settlement of the liability to them of James Cosgrove & Sons Ltd (‘Cosgroves’) which had arisen under a contract in respect of which the respondents had delivered to Cosgroves a quantity of scrap copper. In terms of this contract Cosgroves owed the respondents 717,500 US dollars. The contract was one into which the respondents had entered in good faith and in the ordinary course of commercial dealing, but it was not admitted by the bank or by the minuters that the consideration agreed by the parties to the contract represented the full value of what was done and supplied by the respondents. The intention of Cosgroves in entering into this contract was in order to dissipate part of certain funds which they had lodged with the bank. They had requested and the bank had agreed that payment to the respondents by bankers' draft should be made from these funds. After the draft was issued to the respondents the bank became aware that Cosgroves had been participating in a ‘money laundering’ scheme in which inter alia funds had been obtained from the minuters and fraudulently applied, ultimately by payments into accounts held by the bank for behoof of Cosgroves. The intended dissipation of these funds by Cosgroves was part of a fraud on the minuters and the liability which Cosgroves undertook in their contract with the respondents was undertaken in furtherance of that fraud. The minuters' interest in these proceedings is to secure that the funds which had been obtained from them and ultimately paid into the accounts held for Cosgroves by the bank, which they say they are entitled to recover, are not diminished by payment in accordance with the draft. On behalf of the bank it was stated that they have no substantial financial interest in the result of the appeal, since if they pay the amount of the draft they will be able to recover that sum from the funds lodged with them by Cosgroves which are the subject of an action of multiplepoinding which they have raised. However the bank are certainly entitled to have it determined whether or not they are liable to pay the respondents in terms of the draft, and it was also represented on the bank's behalf that they are seeking to protect ‘the victims’ of the fraudulent scheme, including the minuters. I do not altogether follow the latter submission: if the respondents cannot recover under the draft they will lose the security for payment of Cosgroves' debt to them provided by the bank's assets which they have legitimately obtained. They would be able to sue Cosgroves, but so also could the minuters in respect of any deficiency of the amount which they can recover from the bank out of the funds which were fraudulently applied and deposited by Cosgroves. In my opinion there is no consideration of equity which favours the minuters rather than the respondents in respect of their respective potential losses. Indeed if equitable considerations arise at all, which in my opinion they do not, they seem to me to favour the respondents, who in good faith entered into what appears to have been an ordinary commercial contract for the supply of copper to scrap merchants, rather than the minuters whose interest derives, according to a letter by them quoted in the action of multiplepoinding, from an investment of $10 million which they made with a Luxembourg investment company with whom they have now discontinued their management agreement. They were presumably aware of any risks involved in making such an investment. The respondents on the other hand would have had no reason to suspect that the fund from which the bank proposed to pay under the draft might have been fraudulently deposited.

I regard it as of great importance that the courts should not place any obstruction in the conduct of commerce, and in particular should endeavour not to disturb any longstanding commercial usages. A bankers' draft is, along with other instruments whereby payment can be made, a useful expedient for persons engaging in commerce, since it enables a person acting in good faith who is able to obtain it to rely on the general assets of a bank for payment of a debt due to him incurred in the course of business. In my view it would be most unfortunate if that reliance were to be disturbed, so as to allow for nonpayment by the bank in any case in which after issuing a draft they discovered or suspected that deposit of the particular funds from which they had intended to pay was derived from or was part of some illegal activity.

Counsel for the bank recognised this to be the case, but suggested that in the present case the courts' policy of encouraging and not discouraging commerce conflicted with their policy not to afford any assistance in the commission of crime. In my view there is no such conflict in the circumstances of this case. The illegal activity founded on by the bank is the laundering of money. That activity has already taken place to some extent, but it has now been terminated by the legitimate actions of the bank. In determining whether or not the bank is bound to pay under the draft, the court is in no way assisting or participating in the criminal activity. As I have indicated, it is merely deciding which innocent person has to bear the potential loss arising from criminal activity which has taken place. Such a determination is a familiar part of the court's ordinary function.

These considerations provide in my view a complete answer to the proposition that in the circumstances of this case payment under the draft would be ‘tainted’ by the fraudulent scheme, or, as it is expressed in the bank's first ground of appeal, would constitute part of that scheme. But in any event there is no principle of law or authority which gives any support to that proposition. There is a limit to the application of the doctrine ex turpi causa non oritur actio. In my view that limit has clearly been reached when two innocent parties enter into a commercial contract in which consideration has been given by the party claiming that it is valid. This is subject only to the qualifications, first, that the contract must be one which is not in any event prohibited by statute (as in Boissevain v Weil); and secondly that a person who has received gratuitous benefit as a result of illegal actings is not entitled to retain that benefit. The latter qualification appears to have been that to which Hutchison J referred in Thackwell v Barclays Bank at p 689, when he remarked obiter that even if Mr Thackwell was innocent ‘there is nothing inherently unfair in a result which deprives Mr Thackwell of the proceeds of this cheque’. It is tolerably clear from the citation of authority mentioned in the report that this observation referred to a benefit gratuitously obtained as a result of the commission of a crime, a principle which is well recognised in Scotland.

Counsel for the bank conceded that he could not found an argument on the obiter observations of Hutchison J in Thackwell, and that there was no other authority in point. He submitted that the absence of authority supporting his submission was due to the fact that it was only recently that banks had become sensitive to the crime of money laundering as a result of legislation dealing with the proceeds of drug trafficking, and that extension by the courts of existing principles was justified so as to take account of the need to discourage the occurrence of that crime. But existing principles are based on the protection which the law affords to a bona fide holder of funds for value, and if any alteration of that protection is required so as to prevent money laundering, it is for the legislature to deal with it, as it has in the case of the proceeds of drug trafficking. Further, it seems to me that it would be both ineffective and unfair to impose any restrictions on persons in the position of the respondents. If restrictions are required, they should be imposed on banks, who have the opportunity of making inquiry as to the source of funds which their customers propose to deposit with them. The only effect of imposing a restriction of the reliance which the recipient of a bankers' draft can now place on it would be to reduce or nullify the effectiveness of that instrument.

It was further submitted that in accordance with the principle that a person should not be entitled to retain the benefit of the proceeds of crime, it was for the respondents to aver and prove that they had given what was called ‘full value’ for the right which they seek to assert. In my opinion the extent of averments required in this connection depends on the particular circumstances of the case. Where pursuers aver, as I understand to be agreed is the position for the purposes of this hearing, that they have entered into a genuine commercial contract in respect of which consideration was agreed at arms length and which ex facie does not appear to be unreasonable in amount, it seems to me that the onus of proving that they have received some gratuitous benefit from their contract should lie with the person asserting that. The only Scottish case cited as suggesting the contrary was New Mining and Exploring Syndicate Ltd v Chalmers & Hunter in which embezzled funds had been placed into the bank account of a firm of law agents. It was held that the firm had to prove that they were not thereby enriched. In my view the case laid down no general principle and its circumstances bear no resemblance to those of this case.

For these reasons I hold that the bank's and minuters' defences that payment under the bankers' draft would be illegal because it would constitute part of a fraudulent scheme are irrelevant.

The second ground of appeal is that the bank are entitled to refuse payment under the draft because its issue was induced by Cosgroves' fraud. This too is an attempt to innovate on existing principles, as expressed for example in Young v Clydesdale Bank, that error induced by the fraud of a third party leaves a contractual relationship unaffected. This innovation was, it was submitted, justified by the fact that the bankers' draft was a negotiable instrument, and therefore, if I understood the argument correctly, the situation was close to one in which there was a direct relationship between Cosgroves and the respondents. In my view there is no authority which might support an exception of that nature. The two cases founded on by the reclaimers to support it, R E Jones v Waring & Gillow Ltd and G M Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd did not proceed on the proximity of the relationship between a dishonest third party and a person seeking to enforce his contract. They were based merely on the limited proposition that money paid under a mistake as to the entitlement of the payee to receive it can be recovered from him. It is understandable that the law should allow for such recovery in certain circumstances. While the proposition could also no doubt theoretically be applied so as to stop money from being paid in the first place, it is not the one which is put forward in the reclaimers' second ground of appeal. The bank are not maintaining that they were mistaken in their belief that the respondents were entitled to payment from Cosgroves. They are maintaining that the issue of the draft is invalid because they were in error as to the source from which they intended to pay the stipulated amount. The respondents' entitlement to receive that amount from Cosgroves is not disputed. The two cases mentioned provide no support for the reclaimers' contention that the general rule should be subject to exception in the case of negotiable instruments. In my opinion that general rule should be applied, and the reclaimers' second line of defence is therefore also irrelevant.

I accordingly agree that the reclaiming motion should be refused.

LORD CAPLAN —The pursuers and respondents sue for payment allegedly due to them under a bank draft for £515,793.95 issued by the defenders and delivered to the pursuers at Dundee on 28th June 1993. The pursuers are a German company and they aver that some time prior to the receipt by them of the said bank draft they had sold and delivered to James Cosgrove and Sons Ltd, Dundee, a load of scrap copper. Some difficulty was experienced by the pursuers in recovering the price of the said scrap metal and they aver that in security for the payment due to them Cosgroves granted them two promissory notes for the said price and interest. It is I think undisputed that shortly before the said bank draft was issued, Cosgroves through Messrs MacLeod, Paxton Woolard and Company, who were thought by the bank to be Cosgroves' bona fide agents, deposited with the defenders moneys in excess of the sum payable under the bank draft and it was in the knowledge that they retained this sum in a special account that the defenders chose to grant the bank draft in the pursuers' favour. It is further averred by the pursuers that at a meeting in Dundee on 28th June 1993 at the office of the pursuers' solicitors, the said bank draft was delivered to the pursuers in settlement of the debt owed to them by Cosgroves. The amount of the bank draft is said to correspond to the full sum due as the price of the goods sold together with interest and expenses. Moreover it is claimed by the pursuers that in exchange for the bank draft they delivered to Cosgroves the said two promissory notes.

According to the defenders before the said bank draft had been paid by the defenders it came to their attention that Cosgroves had fraudulently misappropriated certain funds belonging to the minuters and another party. These funds were thereafter transmitted by a series of transactions as part of a ‘money laundering’ scheme. The funds ultimately deposited with the defenders were intended for application in a number of ways among which settlement of Cosgroves' debt was one. The defenders on learning of the background to the case refused to meet the bank draft, hence the pursuers' action against them. The minuters for their part are laying claim to the funds allegedly belonging to them which the defenders continue to retain and they oppose the pursuers' claim to have the bank draft honoured. In fact the defenders have raised separate proceedings in the Court of Session by way of multiplepoinding in an effort to have the entitlement to the disputed funds determined.

After hearing parties on procedure roll the Lord Ordinary by interlocutor dated 30th June 1994 found the defences of the defenders and minuters to be irrelevant and granted decree in favour of the pursuers for the sum they conclude for with expenses. The defenders and minuters now reclaim against the said interlocutor.

It requires to be observed that all parties were agreed that the pleadings in the case are incomplete, but they maintained that the fundamental issues were clear and they wanted if possible that the issues argued should be disposed of without reference to any technical pleading questions that may arise from the present state of the pleadings. Moreover it requires to be emphasised that there is no suggestion in the pleadings, nor was any distinct claim advanced in argument, that either the pursuers or defenders had any preceding knowledge of any irregularity in the provenance of the funds which had been deposited with the defenders nor of any illegal purposes which may have motivated Cosgroves or anyone else in relation to the transactions preceding the issue of the bank draft.

The defenders' fundamental attack on the pursuers' case is that the bank have a right to refuse payment on a bank draft issued in circumstances where after issue but before payment the bank discover that the funds from which they had hoped to recoup themselves in respect of their obligations under the draft have been obtained and circulated illegally or as part of a fraudulent scheme. As a starting point for their argument the defenders accept — indeed aver — that the bank draft constituted a contract in terms of which the bank contracted to pay to the pursuers the amount of the draft. However they claim in effect that they are released from the obligation to pay because of what they allege to be the underlying fraud and separately because of the effect of the alleged surrounding illegality.

With regard to the effect of fraud the defenders accept that there is an established principle of Scots law that an innocent party to a contract cannot escape liability under the contract because the contract was induced by fraudulent misrepresentation on the part of a third party (Young v Clydesdale Bank). However the defenders' senior counsel sought to persuade us that this general rule suffers an exception when the contract in question consists of a cheque or other negotiable instrument issued in implement of an underlying contract. In making this submission he relied upon G M Scott (Willowbank Cooperage) Ltd v York Trailer Co Ltd and R E Jones Ltd v Waring & Gillow Ltd. In each of these cases fraudulent schemes involved the passage of cheques but in my view this circumstance was quite incidental to the grounds of decision. In fact senior counsel accepted that the two cases in question could not be taken as a direct authority for the exceptional treatment he was claiming for negotiable instruments, but he submitted that the principle he was trying to establish could be extrapolated from the cases. In fact I see no warrant for this submission, as will be seen when I discuss what I take to be the grounds for the decisions in the cases in question. It was further contended by senior counsel for the defenders that these cases pointed to a situation where the court will take cognisance of an error induced by fraudulent misrepresentation which causes a party to issue a negotiable instrument. The submission made, as I understood it, is that the defenders would never have granted the bank draft had they not been induced by Cosgroves or their agents to suppose that the funds deposited with them were funds belonging to Cosgroves or at least funds properly available for their use. In my view the relevant ground of decision in G M Scott (Willowbank Cooperage) Ltd is that the defenders may have pleaded a relevant case based on the condictio indebiti. As Lord Justice-Clerk Grant observed at p 19 the pursuers handed over their cheque because they believed they were paying for a particular trailer (which may not have even existed) and which they believed erroneously that they were committed to buying. In other words they were discharging an apparent obligation which if their averments were justified did not exist. Lord Wheatley concurred in the Lord Justice-Clerk's opinion.

The other case relied on by the defenders, R E Jones Ltd is also in my view a case where the obligation underlying the issue of the cheques did not exist. In their opinions their Lordships attribute the avoidance of the underlying contract to ‘mistaken fact’, but in my view it is clear that at least the majority of the judges were deciding the point on the basis that the party issuing cheques was in error as to the circumstances which they supposed obliged them to do so. In other words there was an underlying contract which failed. Both Lord Shaw and Lord Carson refer with approval to the passage in Kelly v Solari where Parke B said: ‘I think that where money is paid to another under the influence of a mistake, that is upon the supposition that a specific fact is true which would entitle the other to the money but which in fact is untrue and the money would not have been paid if it had been known to the payer that the fact was untrue, an action will lie to recover it back.’

In my view the ‘entitlement’ referred to in that passage is the entitlement of the payee to receive the money and it is the failure in that regard which in equity obliges the payee to repay. Lord Shaw emphasises the point when he refers to the underlying contract in the Jones case as relating to the purchase of ‘a phantom article from a phantom buyer’. Lord Sumner observes that the drawer of the cheque had no intention to enrich the payee. Lord Carson states that going to the very root of the matter was an admission by the respondents' counsel that the plaintiffs' case was that they believed that they were paying £5,000 to the defendants in respect of motor cars sold to them by the defendants. Of course in reality no such motors had been sold.

Thus in my view G M Scott (Willowbank Cooperage) Ltdand R E Jones Ltd are each illustrations of the well established implications of the condictio indebiti and in that regard the cases do not contradict or modify the general principle established by Young. In the present case the expectation which the bank may have had with regard to their reimbursement for the bank draft they agreed to issue was no concern of the pursuers. The defenders' error in respect of the source of their funds was a matter collateral to the contract between the pursuers and the defenders, but in no way went to the root of the pursuers' entitlement to the money. We were not referred to any authority which suggests that such error would vitiate a contract if the error was not induced by one of the contracting parties.

The second attack by the defenders on the Lord Ordinary's decision rests on the submission that the contract represented by the bank draft is illegal because the draft was in reality issued as part of an alleged fraudulent and illegal scheme. I find difficulty in seeing why the bank draft itself should be regarded as a pactum illicitum. The issue of a bank draft is not an illegal act. Neither the bank nor the pursuers had any illegal purpose in the transaction. Thus in my view there was no intrinsic illegality in the bank draft itself. However it was claimed by the defenders that the overall series of transactions is tainted with illegality. It was contended that the court should not lend its aid to the completion by Cosgroves of the alleged fraudulent scheme. I fail to see how the point could arise. The fraudulent misapplication of the minuters' funds — if this took place — had already happened. If there was any fraudulent scheme to complete the original fraud it was in setting up a series of transactions which would have camouflaged the attempted application of the embezzled funds. However since the alleged scheme to ‘launder’ money, if it existed, has been discovered this purpose has already failed. The bank have entered into an arrangement to pay a sum of money to the pursuers but this was not contractually tied to a specific fund. As far as the pursuers are concerned they are entitled to look to the bank's general funds for payment of the sum the bank undertook to pay to them. The pursuers are relying not on the bank's capacity to recoup funds which they have expended from their customer but on the bank's responsibility to honour a bankers' draft. The underlying contract which led to the issue of the bank draft was the pursuers' agreement to accept the draft in settlement of the debt due to them by Cosgroves and it cannot be said that that underlying agreement was itself illegal nor that it has failed.

A somewhat indefinite submission was made to us that equity demands that the victim of a crime should not be made to suffer and it was therefore suggested that the minuters rather than the pursuers were the authentic victims who required the court's protection. I fail to see why the minuters should necessarily be regarded as being more serious victims than a party who accepted a bankers' draft in settlement of a debt and then found the expectation of complete settlement had been confounded by a fraud perpetuated on a party totally remote from the pursuers' contract.

The defenders sought to justify their views on the taint of illegality by reference to Thackwell v Barclays Bank plc. In my view that case is of no help to the defenders. In fact Hutchison J decided the case against the plaintiff on the basis that he had been implicated in the fraud. In suggesting that he would also have found against the plaintiff if he had been innocent not only was the learned judge deciding the point on an obiter basis but it is not clear on what precise hypothesis he was relying particularly in relation to the consideration, if any, given by the plaintiff. Moreover in my view Hutchison J was largely if not entirely relying on a doctrine of public policy which even the defenders did not attempt to justify. In any event considerable doubt was cast on the relevant aspect of the case in Tinsley v Milligan.

The remaining argument presented by the defenders concerned the matter of consideration. Senior counsel for the defenders argued that the law required that even an innocent party should not be allowed to make a profit from the fraud of another and indeed the pursuers did not quarrel with that general principle. However it was contended that the requirement was not merely that the potential beneficiary should show that he gave value for any funds transferred to him but that he should show that he gave ‘full value’. Founding on New Mining Syndicate v Chalmers and Hunter it was argued that the onus was on the recipient of funds generated by fraud to show that he had made no profit at all from the receipt of such funds. It was further argued that it seemed that in the present case the pursuers had made some profit because of Cosgroves' alleged fraud. Cosgroves must have been of doubtful solvency so that any personal claim against that company or even action upon the promissory notes might well not have yielded the full amount of the debt owed by Cosgroves. By securing a bank draft for their full debt the pursuers had gained from the alleged fraud, for it was the deposit of the moneys defrauded which had prompted the defenders to issue the draft and the defenders' credit was likely to be substantially more advantageous than the credit of the Cosgrove company. It was argued that it was incumbent on the pursuers to prove what their position would have been had they not received the bankers' draft. However it is notable that the defenders did not produce any authority to vouch the need for the severe scrutiny of potential benefit which they were advocating. In my view the law goes no further on the relevant matter than it would in any area where a question of unjustified benefit arises. Clearly a benefit received without any consideration at all is struck at. Indeed many of the cases relate to that situation. At the other end of the scale if funds illicitly acquired are applied to discharge an onerous contract which is negotiated at arms length, the court in my view is not going to concern itself as to whether the arrangement is likely to prove advantageous to the innocent party who receives the funds (or for that matter might lead to an element of loss). As Gloag states (Gloag on Contract (2nd edn), p 331), a man is not lucratus so as to be subjected to a claim for recompense if the only advantage he has obtained is the payment of a debt lawfully due to him. In the present case (and the defenders did not dispute this) the pursuers settled their lawful claim against Cosgroves by accepting a bankers' draft in settlement. If such a satisfactory settlement had not been offered then presumably the pursuers would have looked to any other immediate remedies against the debtors which may have been available to them. It is not suggested by the defenders that the settlement involving the bankers' draft was not bona fide nor that it was negotiated at other than arms length. Even assuming that the pursuers require to show that any benefit they received from the allegedly embezzled funds was not gratuitous, it is in my view clear from the facts accepted by the defenders that they would inevitably discharge that onus.

The minuters for their part in essence adopt the arguments presented for the defenders. The minuters however take a more guarded view in respect of the background to the Cosgrove transaction. Nevertheless they do not dispute that the pursuers received the bankers' draft in settlement of a debt. Given that the minuters do not impute any mala fides to the pursuers, they are for the reasons I have given above effectively conceding that the pursuers gave a proper consideration for the acquisition of the draft.

For the reasons which I have set out I consider that the Lord Ordinary reached the correct conclusion and subject to the agreed adjustment of the pleas in law which were sustained I would refuse the reclaiming motion.