Supreme Court dismisses breach of mandate appeal

The Supreme Court has dismissed an appeal by Westpac New Zealand Ltd from a Court of Appeal decision which had held the bank liable for breach of mandate.

In Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89 (16 August 2011), Westpac had declined to pay monies standing to the credit of MAP in accordance with MAP's instructions. When sued by MAP for breach of mandate, Westpac argued that it had good reason to be concerned that if it had paid in terms of MAP's instructions, it would have been dishonestly assisting MPA in committing a breach of trust.

Westpac contended that its belief that it was vulnerable to a claim for dishonest assistance should be recognised as a valid defence to the claim for breach of mandate. There was no evidence of any breach of trust and Westpac never tried to establish that if it had acted on MAP's instructions it would actually have become liable to an action for dishonestly assisting in a breach of trust.

Delivering the unanimous decision of the Supreme Court, Tipping J noted that as a matter of contract, a bank's clear initial duty was to act in terms of its customer's instructions [at 11]. Liability to perform a contract was generally strict.

Where frustration or illegality of performance was said to excuse non-performance of a contract, the contract must actually have been frustrated or it must actually have been unlawful to perform it. Similarly, equity did not restrain an action at law on a contract simply on the basis that a party reasonably suspected or believed that the contract had, for example been procured by undue influence or represented an unconscionable bargain.

"Proof must be given of the actuality, not of a belief or suspicion, however reasonable that state of mind may have been," Tipping J said [at 14]. "The present case can fairly be viewed as coming within that rubric, consistent as it is with the common law approach that liability for breach of contract is generally strict."

Tipping J accepted that banks in the present kind of situation were in an awkward position. However, banks were in the business of receiving customers' money and using it to their advantage. The risks involved were inherent in conducting their business and were better managed by the bank than its customer.

"In that light we consider the customer should not bear a loss occasioned by a breach of mandate unless the breach is justified because the bank would actually, rather than potentially, have incurred liability by acting on its customer's instructions. A contrary conclusion would result in the bank having the best of both worlds: the benefit of a lesser standard for a defence but a higher standard for liability."

After considering case law on the issue, Tipping J felt that a dearth of modern authority directly on the point was probably due to the fact that the law has been regarded as settled over a century ago by the decision of the House of Lords in Gray v Johnston (1868) LR 3 HL 1.

The Supreme Court decision also considered how suspicion related to the overriding need for proof of dishonesty. After looking at relevant decisions by the Privy Council and House of Lords, it concluded that it was necessary that the strength of the suspicion that a breach of trust was intended made it dishonest to decide not to make inquiry.

"That state of mind, which equity equates with actual knowledge, is usually referred to as wilful blindness. It involves shutting one's eyes to the obvious and can thus fairly be equated with the dishonesty involved where there is actual knowledge," Tipping J stated [at 27].

The Supreme Court concluded that as Westpac could not show that any breach of trust would actually have occurred had it followed MAP's instructions, it had no defence to MAP's claim for breach of mandate. The appeal was dismissed, with costs.