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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> International Sponge Importers Ltd v Andrew Watt & Sons [1911] UKHL 1 (31 March 1911)
Cite as: [1911] AC 279, [1911] UKHL 1, 1911 1 SLT 414, 1911 SC (HL) 57

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31 March 1911

International Sponge Importers, Limited,
Watt & Sons.

Lord Chancellor.—In this case I agree upon the whole with the Second Division, though I have found, as no doubt they found, some difficulty.

It is a peculiar case. The Sponge Company employed an agent named Cohen, who proved to be a rogue. His authority was to carry round with him parcels of sponges, to sell them and fix the price, to deliver them, and to receive cheques in payment. He had dealt with Messrs Watt for a considerable time, and generally—nearly always in fact—Messrs Watt paid for the sponges they bought by crossed cheque payable to Cohen's principals. In 1904, however, if not earlier, Cohen commenced a system of fraud. He sold and delivered sponges to Messrs Watt as before, but on four occasions he induced them to pay at once, either by open cheque payable to Cohen or by coin and notes, and then embezzled the money. The International Sponge Company now say that these four transactions were beyond Cohen's authority, and this action relates to three of the transactions.

Now, the summons in this action claimed that, by reason of Cohen's fraud, the property in the sponges sold and delivered by him on these three occasions never passed to Messrs Watt, and that they should therefore be redelivered to the pursuers. Your Lordships do not attach much importance to merely technical objections, but I am not at all persuaded that there is not substance in Mr Macmillan's complaint that he has been put to a disadvantage by the pursuers' change of front. For the argument of Mr Buckmaster in this House did not impugn the validity of the sale by Cohen, but did impugn the validity of the payment. He does not deny that the property passed, but says that the price must be paid over again. It was a different contention altogether, and the defenders may well have been prejudiced by being led so to direct their conduct of the litigation as to meet only a line of attack which has now been abandoned. However, I need not dwell upon this point, because in any view it seems to me that the appeal must fail.

It is clear that Cohen had no actual authority to receive in payment for sponges anything except crossed cheques in favour of the pursuers. It is not, however, established that Messrs Watt had express notice that, while he might receive payment, such payment could only be in the way of crossed cheque in pursuers' favour. There is a printed direction in the form of account usually rendered, relating both to payment by cheque and to the form of receipt. It is, however, partly equivocal, for it admits of a construction which allows of payment in cash, and in such case would dispense with the prescribed form of receipt. Still I am impressed by Mr Buckmaster's argument that, whatever the notice may be, Messrs Watt had no right to pay so large a sum as £120 in notes or gold, as they did on one occasion, or to pay by open cheque payable to Cohen, as they did in the three incriminated transactions, because that was not in the ordinary course of business. And the excuses invented by Cohen to induce the defenders to pay in that way were flimsy enough. I should be very sorry to affirm as a general proposition that such payments to a traveller are to be upheld.

What determines me, though not without doubt, in upholding these payments in the present case is this. The good faith and integrity of Messrs Watt are undisputed and indisputable. Cohen occupied a position of fuller authority than is usual. The only limit of his actual authority was as to the kind of cheque he might receive. And, finally, it is clear that on one occasion, a year or so before the last transactions, Messrs Watt had paid by open cheque payable to Cohen, and, though the attention of the Sponge Company was drawn to the sale and a question arose about it between them and Messrs Watt, yet it was allowed to stand and no objection was taken.

In the same way, the later transactions passed at the time without complaint or objection, and it was only after Cohen's dishonesty had been discovered that, on investigation of his frauds, the responsible managers of the pursuers' business found that their traveller had sold and delivered these sponges and received payment for them himself.

No doubt the reason of this protracted oversight was that the pursuers were the victims of a conspiracy among their own staff. Books had been falsified, auditors deceived, and documents concealed, so that the responsible managers were not aware of Cohen's dishonest dealings or of his departure from his instructions. But the same conspiracy which cheated them had also the result of misleading the defenders, Messrs Watt, and causing them to act as though Cohen was entitled to receive payment in the manner in which they made it.

Accordingly, this order ought, in my opinion, to be affirmed.

Lord Atkinson.—I concur.

Lord Shaw of Dunfermline.—For some years the respondents, who are a firm of saddlers in Edinburgh, have been in the habit of purchasing sponges from the appellants' firm. The appellants were represented by a commercial traveller of the name of Cohen. The goods were sold in bulk and not per sample, and, accordingly, Cohen was entrusted with the goods, which were seen by the customer and taken delivery of when bought. In the course of these years a certain number, not very large, of transactions of purchase were made, and in three of these the payments were made by cheques in Cohen's favour, namely, in February 1904, October 1905, and

October 1907. In the fourth sale (in May 1908) payment was made by cash. In the proceedings in this action the payments of 1905, 1907, and 1908 are challenged. The payment of 1904, possibly by inadvertence, is not challenged. Substantially the transactions were—goods bought and delivered and ready money paid. One satisfactory feature of the present case, as argued at your Lordships' bar, was that no suggestion, direct or indirect, was made against the complete good faith of Messrs Watt & Sons in settling for the goods on those terms. As Mr Watt observes in his uncontradicted evidence, “I have had cash transactions with other travellers quite frequently, who have sold me goods for cash on the spot.”

In the autumn of 1908 it came to the knowledge of the appellants that irregularities were being committed by their employees, and a representative was dispatched to make inquiries. In the course of his journey he visited the respondents, who gave every assistance in tracing the defalcations of Cohen. Mr Watt explained that, in addition to the credit transactions which had taken place, there were some cash dealings; and he produced all the books and documents which bore upon these. In short, it is admitted that it was owing to the candour of Mr Watt that discovery of irregularity on the part of Cohen was made. This fact, of course, does not truly bear upon the legal responsibility, if any, resting upon the respondents' firm, but it confirms the position of the firm's entire good faith.

Having obtained this information from Messrs Watt & Sons, the appellants proceeded to sue them for the value of the three parcels of goods referred to. Their plea now is that the payments already made by the Scotch firm shall stand out of the account because they were made to a person who was not authorised to receive cash. In so putting the point I approach much more nearly to a really stateable case in law than the appellants' summons did. Having considered the latter, I am of opinion that the action as laid was an action for re-delivery of the sponges sold, and, failing re-delivery, and only in that event, for payment of their value. The shape of the whole action accords with the summons, and, in my humble judgment, the case as presented to the Lord Ordinary was that case and nothing else. The ground taken up was that there had been no sales, because Cohen was a thief in possession of stolen goods, and a vitium reale remained attached to these in the hands of Messrs Watt & Sons. At your Lordships' bar, however, what was argued was that payment, that is to say a second payment, by Messrs Watt was due on the ground mentioned, namely, that Cohen had exceeded, in the knowledge of Messrs Watt, his authority by receiving cash. In that position a serious question might have arisen as to whether the appellants were entitled under the summons and case as laid, to obtain a decree as if upon a simple petitory conclusion, and the principle of the judgment in White v. Victoria Lumber Company might have been appealed to as to whether such a change in attitude at such a stage of the proceedings was permissible. I do not think it necessary to make any pronouncement upon that point here, because, first, I think that the view presented so ably by Mr Buckmaster was, to some extent at least, before the minds of the Judges of the Inner House; and, secondly, after full consideration, I have come to be of opinion on the merits of this case that in the shape in which it is now presented it is without legal foundation. The case now made, however, is of importance to the mercantile community, and especially, as one can easily figure, in the practice of business as between wholesale and retail traders.

The respondents had other transactions than those above named with the appellants. And the latter found upon the course of dealing, and the language of the billheads and statements of account which passed between the parties, as being sufficient to charge Messrs Watt with knowledge as to what was the only permissible form in which sales were permitted by the appellants to their travellers. On the top of these statements of account there were printed the words “Terms 212 per cent discount for prompt cash.” On some of the documents (and I observe on the document of October 1906) the words were “Terms strictly net.” There were also printed these words: “Cheques to be crossed ‘National Provincial Bank of England—account payees.’”

No one can doubt that these words did not in this case impress the customer with the view that cash payments were forbidden. And I am, after full consideration, unable to affirm that they constitute a plain declaration, by which customers with the International Sponge Importers, Limited, are bound, that no ready-money trade is done by that firm, and that travellers are prohibited from receiving money in exchange for goods delivered. It appears to me that such a prohibition should not be lightly inferred. The retail customer, visited by the well-known representative of a wholesale firm, does not, in my opinion, make an unreasonable or improper or careless supposition when he assumes that, if such an agent or traveller holds the double position of, first, being actually charged with the custody of goods and the delivery of these, and, secondly, being trusted by his employers to collect moneys due upon account, the same agent or representative is empowered to make even better terms for his employers by taking cash—rather than postponed terms of payment—for the goods handed over. I agree with the language of Lord Low upon this point: “Of course, the allowance of credit is entirely in favour of the buyer. It would be much better for the seller every time to get his money down in exchange for the goods, and I can see nothing in the fact that the practice of the pursuers was to give credit, and, of course, of the purchasers to take credit, which could have led to the conclusion that it was beyond the power of their traveller to make a cash transaction.”

In short, I do not doubt that not only did Messrs Watt & Sons in good faith believe, but they were warranted in believing, that the trusted agent of the appellants had power to take the best terms for goods delivered,—that is to say, cash, or its equivalent, namely, a cheque in his favour which could be cashed on the spot.

These views are sufficient to dispose of the case. But if we turn to the chapter of responsibility upon the part of the appellants' firm, the case presents singular features. When an agent is charged with the custody and disposal of goods in bulk, the ledgerising of those goods, and the accounting for the balance thereof unpaid for in cash or unaccounted for by way of invoice, checks his intromissions and discloses in, say, monthly or quarterly periods the deficiencies in his stock. Such disclosure would put all parties on their guard, and go far to stop both delinquencies and blunders. I cannot find in this case any sufficient explanation why this firm was unable to discover by their ordinary course of business that stock was disappearing and defalcation going on.

The importance of that in regard to the respondents is this, that had the very first transaction been investigated on that footing, it would have led to the discovery of a payment in cash not represented by invoice, and therefore the respondents would have been apprised by the appellants that cash payments were objected to and contrary to their methods of business. The customer, however, was left in the position of this payment four years ago being unchallenged, and he repeated on three subsequent occasions similar transactions in good faith. I should think it a very strong thing to hold that the wholesale dealer, thus (through possibly the defalcations of other employees) leaving the customer in the position of making payment after payment in cash without challenge, is entitled now to impugn the entire series as contrary to the custom of trade. It is unnecessary to deal with this point further, except to say that, even although my view had been different upon the main issue, I should have held it almost impossible to affirm, with regard to any of the transactions subsequent to the first which remained unchallenged, that the views of the appellants could be maintained. In my opinion the appeal fails.

[1911] SC(HL) 57

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