The decision of the Court of Appeal of Hong Kong in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd.1, discussed in the November 1984 issue2, has been reversed by the Privy Council3. In essence, the Privy Council took a narrower view of the customer’s liability for the fraud of his employees than that taken by the Court of Appeal of Hong Kong. It will be recalled that that court held that the customer had to bear losses incurred as a result of forgeries executed by the employee if these were facilitated by a careless business procedure. The Privy Council reverted to the view attributed to the House of Lords in London Joint Stock Bank Ltd. v. Macmillan 4, under which the customer is liable only for losses resulting from his carelessness in the drawing of cheques. As regards the other issue in the case, which concerned the clauses imposing on the customer a duty to check periodic statements submitted to him, the Privy Council affirmed the judgment of the majority of the Court of Appeal. It was held that the clauses incorporated in the standard form contracts used by the three banks in Tai Hing fell short of imposing absolute liability on the customer.

The decision of the Privy Council is of major importance to banks. It indicates that despite the phenomenal increase in the volume of banking business that has taken place since the decision of the House of Lords in Macmillan, handed down in 1918, and the resulting pressures on banks, their liability remains as wide as it was at the turn of the century. Unless a bank is able to establish an estoppel, as defined in Macmillan and in the later House of Lords decision in Greenwood v. Martins Bank Ltd.5, the customer’s account cannot be debited with the amount of cheques forged by the employee even if a reasonably cautious employer would have detected them forthwith or would have employed a system of work that would have obviated them. It remains to be seen whether some banks will now attempt to safeguard their position by introducing effective “verification clauses” into their contracts with customers. Suitable models for such clauses can be readily found in Canadian banking contracts6.

It is clear that the Privy Council’s decision settles the points in question for the time being. But one may be forgiven for wondering whether, in reality, the Board has not missed the opportunity of bringing the law into accord with the requirements of modern banking practices. In the first place, it is questionable if the narrow doctrine, attributed to Macmillan and traceable to the much earlier decision in Young v. Grote 7,