London Joint Stock Bank, Ltd v. Macmillan & Arthur

Factual and Procedural Background

The Plaintiffs, a firm of general merchants in The City, maintained a current account with the Defendant bank. A trusted clerical employee (“the Clerk”) routinely completed cheques for petty-cash and presented them to a partner of the firm for signature.

On 9 February 1915, while a partner was hurrying to lunch, the Clerk produced a loose cheque. The partner signed it, intending a payment of £2. At the time of signature:

• The space for the amount in words was entirely blank.
• The figure space contained only a solitary “2,” leaving room on either side for additional numerals.

After the partner left, the Clerk inserted “one hundred and twenty” in words and altered the figures to “£120.” The cheque, payable to “Ourselves or Bearer,” was cashed over the counter the same day, after which the Clerk absconded.

The Plaintiffs sued, seeking a declaration that only £2 should be debited, or alternatively damages of £118. Judge Sankey found for the Plaintiffs; the Court of Appeal affirmed. The bank appealed to the House of Lords.

Legal Issues Presented

1. Does a customer who signs a cheque in incomplete form and entrusts it to an employee breach a duty of care owed to the banker, thereby rendering the customer liable for losses caused by the employee’s fraudulent completion of the cheque?
2. In consequence, was the Defendant bank entitled to debit the Plaintiffs’ account with the full £120 paid on the altered cheque?

Arguments of the Parties

Defendant’s Arguments

• The customer owes a duty to draw cheques with reasonable care so as not to facilitate forgery (Young v. Grote principle).
• By leaving the amount in words blank and positioning the solitary “2” so that it could be easily altered, the Plaintiffs negligently facilitated the fraud.
• Alternatively, having signed a cheque “in blank,” the Plaintiffs are bound by the instrument as filled in by their authorised agent (the Clerk).

Plaintiffs’ Arguments

• The Plaintiffs exercised reasonable business practice in trusting a long-serving, apparently trustworthy clerk.
• The immediate cause of loss was the Clerk’s criminal forgery, not any negligence of the Plaintiffs.
• The figures “2 00” on the cheque limited the Clerk’s authority; the bank should therefore bear the loss.

Table of Precedents Cited

Court's Reasoning and Analysis

The majority, led by Judge Finlay, accepted the lower courts’ findings of primary fact but disagreed with their inference on negligence:

1. A cheque is a mandate; the customer’s contractual duty includes drawing it with reasonable precautions against forgery.
2. Leaving the words blank and the figure “2” exposed on both sides “facilitated or almost invited” fraudulent alteration; such forgery is a natural and direct consequence of the customer’s negligence.
3. Complete faith in an employee cannot excuse breach of the independent duty owed to the banker.
4. Under s. 20 Bills of Exchange Act 1882 and the common-law rule, one who signs an incomplete negotiable instrument is bound by its completion within the limits of the paper; therefore the Plaintiffs are bound by the cheque as filled in by their authorised agent.
5. Equity of loss: even if the bank technically lacked a valid mandate, it could recover the same amount from the customer for negligence; to avoid circuity of action the debit must stand.

Holding and Implications

APPEAL ALLOWED. Judgment entered for the Defendant bank with costs in all courts.

Implications: The decision reaffirms and strengthens the rule that customers must exercise reasonable care in drawing cheques. Signing cheques with blank or easily alterable spaces constitutes negligence, shifting the risk of employee fraud from the bank to the customer. No new precedent was set, but existing principles were emphatically applied.