Pursuers: Currie, Q.C., Duncan; Dundas & Wilson

First Defender: Ellis, Q.C., Hill; Balfour + Manson LLP

No representation for Second and Third Defenders

6 October 2008

[1] On 29 August 2008 I heard a debate at the instance of the pursuers on their second plea-in-law (added by amendment at the beginning of the debate), a plea to the relevancy and specification of certain averments made by the first defender. Having heard submissions, I formed the view that I should exclude from probation all but two of those averments and, in addition, should make certain deletions from the two averments which I did not exclude altogether. As regards three of the passages to be deleted, I indicated that I would be minded to allow averments in a revised (and more limited) form. I so informed the parties at the end of the debate and briefly gave reasons for my decision. The parties have asked me to set out those reasons more fully and in writing.

[2] The pursuers seek to recover from the defenders jointly and severally the sum of £1,190,921.49. So far as concerns the liability of the first defender - and only the first defender has taken an active part in these proceedings - the pursuers aver that the debt arises from borrowings by a firm of which he was a partner; or if he was not a partner, that he held himself out as such and is thus liable with the other partners for the firm's debt; and, in any event, that he agreed in a letter of 3 November 1999 to be jointly and severally liable for borrowings undertaken in the name of the firm by the third defender.

[3] The first defender contends, in outline, that he did not consent to any of the arrangements made in his name; that the setting up of the account in his name was part of a fraudulent scheme by Dominic Keane to obtain funds from the pursuers; that employers of the pursuers were aware of and party to that fraudulent scheme; that, in handling the account, the pursuers departed from the ordinary standards of prudent bankers and the only explanation for that is that they were party to the fraud; and that, in any event, the pursuers were in breach of contract in their dealing with the account and should not be entitled to rely upon that breach.

[4] In support of these lines of defence, and in addition to his averments directed specifically to the actings of Dominic Keane and various employees of the pursuers in relation to the account for which he is said to be liable ("the partnership account"), the first defender makes a number of averments about what has been, for convenience, referred to as "the wider Keane connection" and, in so doing, makes averments about the activities of Dominic Keane beyond those directly concerning the partnership account. It is about these averments that the pursuers complain.

[5] The averments in issue at debate are identified in the Appendix to the pursuers' Note of Arguments (No.54 of Process). They are all to be found in Answer 3. For convenience I shall number and summarise them as follows (page references are to the Record as adjusted to 23 June 2008, No.55 of Process):

(1) At page 12, the first defender avers that there was no partnership as alleged. He explains that the documents relied upon by the pursuers were never consented to by him. He continues:

"The purported documents were prepared by Dominic Keane as part of interconnected fraudulent schemes to obtain money from the pursuers for his use. As part of those schemes he also fraudulently used the name of his brother Edmund Keane and Jimmy Jones to obtain funds from the pursuers."

(2) At page 13A-B, having averred that the pursuers had, on the instructions of Dominic Keane, opened an account in the name of the first defender and that funds amounting to £900,000 were transferred into it in September 1998 from Jimmy Jones, the first defender alleges that "Jimmy Jones was another party who was being defrauded by Dominic Keane".

(3) At page 15A-B, in referring to the background against which it was possible for Dominic Keane to put the fraudulent scheme into effect, the first defender says that:

"[Dominic Keane] removed money from accounts of his brother Edmund Keane and Jimmy Jones and borrowed on those accounts. He had mandates to use those accounts but only for the purposes of his brother and Mr Jones. He had a large number of facilities with the pursuers under the umbrella title of the Keane Connection."

(4) At page 16E, the defenders make averments that Dominic Keane had assistance from people within the pursuers, in particular a Mr Reid and a Mr Cavellini. Having averred that it was unlikely that Mr Cavellini would have assisted Dominic Keane without the knowledge and complicity of Mr Reid, the first defender says this:

"Further [Mr Reid] was aware that as part of obtaining finance for his various requirements Dominic Keane was using the accounts of Edmund Keane and Jimmy Jones without their knowledge. He assisted Dominic Keane in hiding transactions on the accounts from the account holders. He assisted Dominic Keane in obtaining a security for the pursuers over Dominic Keane's house without the knowledge of Dominic Keane's wife."

(5) At page 17A-E, the first defender makes averments which go to the likely motivation of Messrs Reid and Cavellini. In a passage which runs over a whole page, he avers that the pursuers appear to have allowed Dominic Keane to operate from many accounts with them and to borrow substantial sums across many accounts; that the pursuers appear to have treated their exposure to indebtedness in which Dominic Keane was involved as "to a large extent connected" and referred to it as the "Keane Connection"; that the Keane Connection was likely to have included an indebtedness fraudulently acquired by Dominic Keane in the name of his brother and Jimmy Jones; that the pursuers appear to have taken into account the wider exposure to the Keane Connection; that Messrs Reid and Cavellini had reason to wish to keep Dominic Keane's financial position afloat; that the frauds committed on the first defender were part of Dominic Keane's wider fraudulent schemes to fund his business and plans; and that Mr Cavellini assisted Dominic Keane in various respects in relation to the accounts of Edmund Keane and Jimmy Jones.

(6) At page 33B, having averred that the pursuers failed to comply with their internal policies and procedures, the first defender goes on to say this:

"It is believed and averred that many of the omissions were because of the involvement of [Mr Cavellini] and [Mr Reid] in Dominic Keane's scheme which was part of his wider fraudulent schemes involving parties other than the first defender and Mr McGuinness."

(7) At page 34D - 35C, the first defender makes averments designed, as I understand it, to enable him to seek recovery of internal reports that must, he contends, have been generated within the pursuers. To this end, the first defender avers that as the pursuers applied pressure to Dominic Keane in January and February 2004 to secure repayment of his indebtedness "across the Keane Connection", Mr Keane wrote to the pursuers' Chief Executive. This led to various meetings, at one of which Dominic Keane was told that his request would be considered "at the highest level" which, he says, must be a reference to the Chief Executive. The first defender avers that for some time thereafter the pressure on Dominic Keane was eased. The inference sought to be drawn is that the senior management of the pursuers must have been provided with reports on the indebtedness of the Keane Connection, including a report explaining that the Bank had not followed its own internal procedures, and why that was so.

(8) At p.35D-E, the first defender avers that "senior employees of the pursuers were at all material times aware that Dominic Keane was involved in fraudulent schemes to obtain funding for his home business interests."

(9) At p.36A-B, the first defender makes the following averment:

"On 13 December 2004 responsibility for the Keane Connection appears to have been passed to the pursuers' Special Lending Services Department. At that stage the pursuers would have carried out a full review into the accounts of the Keane Connection. Reports confirming that normal policies and procedures of the pursuers had not been followed and offering explanations will have been produced by the pursuers' staff. Such reports are likely to have been retained by the pursuers."

(10) At page 37A-B, in the context of the records likely to have been kept by the pursuers, the first defender avers that:

"Several of the pursuers' exposures to the Keane Connection had been accorded 'amber' indicators which indicated that Dominic Keane of the three purported partners was under financial pressure."

(11) At p.38E - 40A there is a passage, running to about a page and a half which seeks, as I understand it, by way of similar fact evidence, to lay the basis for establishing that the pursuers' failure to act in accordance with the ordinary practice of a reasonably prudent banker was a feature not only of the particular account with which this action is concerned but also of accounts in the name of Edmund Keane and of Jimmy Jones.

(12) At p.40C, in support of his averment that the pursuers were not in good faith in relying upon obligations purportedly undertaken by him towards them, the first defender makes a number of points about the pursuers' employees' knowledge of Dominic Keane's fraudulent scheme involving him, and their awareness that he knew nothing of the purported partnership and its purported liabilities. He seeks to rely upon

"the knowledge of the pursuers' senior employees that Dominic Keane was involved in fraudulent schemes together with the other factors averred above and in Answer 4 and [in light of that knowledge] the pursuers' failure to follow normal banking practices".

In so far as this goes further than what has already been averred concerning their knowledge of Dominic Keane's fraud in relation to the first defender, this appears to be an averment relating to the pursuers' knowledge of Dominic Keane's fraud in relation to Edmund Keane and Jimmy Jones.

Where I have quoted verbatim from passages in the Record, I have italicised those parts which the pursuers sought to exclude from probation.

[6] Mr Currie, Q.C., for the pursuers, submitted that those averments were irrelevant to the determination of the issues between the pursuers and the first defender. The fact that Dominic Keane might or might not have defrauded other people on other occasions did not assist in determining whether he defrauded the first defender on this occasion. The argument on good faith depended upon proof that the pursuers' employees' knew of Dominic Keane's fraudulent activity in relation to the first defender. The resolution of that issue was not assisted by showing that they might or might not have known about his activities vis a vis others. Nor could it be relevant to show that, in respect of bank accounts other than the partnership account, the pursuers had failed to follow the practice of ordinary prudent bankers. Evidence that the pursuers failed in these respects or had such knowledge of Dominic Keane's activities in relation to others had no probative value when it came to determining whether they had acted in the manner alleged in relation to the first defender. The first defender was seeking to raise collateral issues which were too remote properly to assist in deciding the issue in this case. Investigating these issues would massively extend the scope of the enquiry at proof. That would far outweigh any possible probative value.

[7] Mr Currie referred me to a number of authorities in support of his submissions, namely Inglis v National Bank of Scotland 1909 S.C. 1038, Swan v Bowie 1948 S.C. 46, Alexander v Dundee Corporation 1950 S.C. 123 and Strathmore Group Limited v Credit Lyonnais 1994 S.L.T. 1023. In his submissions, Mr Ellis, Q.C., for the first defender, referred in addition to Hart v Royal London Mutual Insurance Co Limited 1956 S.L.T. (Notes) 55, Gallacher v Paton 1909 S.C. (J.) 50, Bark v Scott 1954 S.C. 72 and O'Brien v Chief Constable of South Wales Police [2005] 2 A.C. 534 at paras.56 and 77.

[8] Those cases illustrate two points of importance. First, in any discussion of this type, it is necessary to consider whether the evidence which might be adduced were the averments allowed to remain would be relevant in the strict sense. As Lord M'Laren pointed out in Inglis v National Bank of Scotland at p.1040,

"it is not evidence against a party of having committed a delict to shew that he has committed delicts of the like description against other persons on other occasions."

The position may not always be clear cut (c.f. the passage referred to below from the Opinion of Lord Sorn in Swan v Bowie), but a consideration of this issue logically comes first.

[9] Secondly, even if the matter sought to be proved might be regarded as relevant, it may be right on grounds of expediency to exclude evidence and averments relating thereto if its likely probative value is too remote and the time and expense of investigating it disproportionate to its value.

[10] On this latter point, there was in fact little dispute as to the applicable law. It is convenient to refer to two cases. The first is Swan v Bowie. That was a defamation action in which the court refused to exclude from probation evidence of certain letters written by the defender on the ground that although in one sense they were collateral, they were in fact directly relevant to proof of the defender's handwriting. In the Outer House, Lord Sorn put the matter in this way (see p.48):

"Now, at first sight, this looks like an attempt on the part of the pursuer to help out his proof by proving that the defender had done the same kind of thing on other occasions to other people and, in that way, to lend probability to his own case. If that were the only significance of the averments I should undoubtedly have to hold them irrelevant, because it is well settled that the Court will not allow a pursuer, who sets out to prove that the defender has perpetrated a certain act against him, to facilitate that proof by proving that the defender has perpetrated similar acts against other people. It is not that such evidence, if allowed, would be without bearing or weight but because, with the object of setting some limit to the scope of proofs and trials, the rule has been adopted that that enquiry into collateral issues is not permissible."

He added (at p.49) the following:

"... when the Court is asked to allow investigation into apparently collateral issues, there is a duty to scrutinise with great care the averments by which such issues are incorporated into the main issue and to be reasonably satisfied that the investigation is necessary in order to give the pursuer a fair chance of proving his case."

A reclaiming motion to the Inner House was refused. Lord President Cooper put the matter thus (at p.51):

"In the ordinary case it is of course well settled - not perhaps so much on grounds of strict relevance as on grounds of convenience and expediency - that 'collateral issues' will not be allowed to be investigated."

[11] The Scottish cases were comprehensively reviewed by Lord Osborne in Strathmore v Credit Lyonnais. At page 1031 H-J he summarised the principles emerging from the cases in this way:

"First, the ultimate test of the relevancy of averment or evidence is whether the material in question has a reasonably direct bearing on the subject under investigation. In any particular case, there could come a point at which it would be possible for the court to say that the bearing of some fact was too indirect and too remote properly to assist in deciding the issue in question. Secondly, in my opinion, it is apparent that expediency has a part to play in reaching a decision as to what averment or evidence may be held to be relevant, and what not. Accordingly, judicial discretion is involved to that extent in deciding upon the point at which averments or evidence must properly be excluded as irrelevant. Thirdly, it is unhelpful and possibly misleading to focus attention on the word 'collateral' in the consideration of this kind of question. That aspect of the matter was emphasised by Lord President Cooper in Bark v Scott, 1954 S.C., p.76 ... where he said:

'and I take it, therefore, that the question is one of degree in each case, the determining factor being whether the matters averred are, in a reasonable sense, pertinent and relevant and whether they have a reasonably direct bearing on the subject under investigation, or whether on the other hand they fall to be rejected as being too indirect or too remote'."

I accept Lord Osborne's qualification that it is perhaps unhelpful and possibly misleading to focus attention on the word "collateral"; it is better to ask whether in the particular case the matters averred are "in a reasonable sense, pertinent and relevant and whether they have a reasonably direct bearing on the subject under investigation". I suspect that the difference is more one of terminology than of substance.

[12] The question I have to ask myself is whether the averments in issue are relevant in the strict sense and, even if they are, whether they have a reasonably direct bearing on the issues in the case. In answering this latter question, I accept that the onus is on the party seeking to exclude the averments to show that they are, in this sense, not sufficiently pertinent to be allowed to remain in the pleadings.

[13] Having considered carefully the submissions made to me about the passages to which I have referred, I formed the view that I should exclude from probation the italicised words in the passage referred to at (1) and the whole of the passages referred to at (2), (3), (4), (5), (6), (9), (10) and (12). Those passages contain averments (a) of fraud committed against the pursuers by use of accounts in the names of Edmund Keane and Jimmy Jones, or against Edmund Keane and Jimmy Jones themselves and (b) of the knowledge of employees of the bank about such fraudulent conduct and their involvement in it. In my opinion the actions of Dominic Keane in relation to other people and other bank accounts is simply not relevant to the question of how he acted in relation to the partnership account. Nor is the pursuers' knowledge of his actions in respect of those other matters probative of their knowledge of his alleged fraud in relation to the partnership account. Even if it might be said to have some "bearing or weight" in relation to the question of the pursuers' knowledge and involvement, in the sense of helping to rebut a case that the pursuers' employees were not the sort of people to do such a thing, it has, in my opinion, an insufficiently direct bearing on the matter to justify the expense of investigating it. By expense, I do not simply mean the expense laid on the pursuers in producing documentation relating to these other issues - I mean the expense of exploring at proof not only the question of Dominic Keane's conduct in relation to the first defender and the partnership account, which is directly in issue, but also his conduct in relation to two other individuals and their accounts, which is not. Even if his fraud in relation to the other individuals was proved, and it was proved that the pursuers' employees knew of or participated in that fraud, it would not prove his fraud in relation to the first defender and the partnership account, nor the knowledge or involvement of the pursuers' employees of his fraud in relation to the partnership account. At best it might give rise to some cross-examination on credibility, but there are limits on the right to cross-examine simply on credibility by reference to matters which are not directly in issue in the proceedings; and it would, in my view, be going too far to allow investigation of all these matters simply so that the credibility of the pursuers' employees could be challenged at proof.

[14] I indicated, however, that I would be minded to allow the first defender to amend (9) and (10) to restrict the averments to those having a reasonably direct bearing on the partnership account.

[15] For similar reasons I decided that the passage at (8) should be limited to focus the averment only on Dominic Keane's conduct in relation to the first defender and the partnership account rather than his conduct in relation to the others. This could be achieved by replacing the words "fraudulent schemes" in the passage quoted by the words "the fraudulent scheme". With this alteration the averment would be unexceptionable.

[16] The passage at (11) falls to be dealt with on a similar basis. The difference here is that the averment is a bald one that the pursuers did not deal with the accounts of Edmund Keane and Jimmy Jones in accordance with its own internal regulations and the ordinary practice of a prudent banker. This cannot assist in ascertaining whether the pursuers were lax in respect of the partnership account. That will be dealt with by direct evidence of what happened. Nor can it be evidence of the pursuers' motivation for so failing in respect of the partnership account. Even if it could throw some light upon these matters, I again came to the view that it was insufficiently pertinent to allow it to remain. I decided that the whole of that passage should be excluded, except for the last sentence (beginning "many of those failures") which could remain in as referring to the matters directly in question in the present action if the words "fraudulent schemes" were replaced by "fraudulent scheme", an alteration similar to that in the case of the averment at (8).

[17] I have left the passage at (7) until last since it raises slightly different considerations. This averment was designed, as I saw it, to support an application for recovery of internal reports relevant to the pursuers' own consideration of the partnership account. It was criticised as being both too wide and wholly speculative. I took the view that the averment, referring to the wider Keane connection, went further than was necessary or justifiable in accordance with the principles I have set out. However, I indicated that I was prepared to allow an amendment to restrict its scope to the matters directly in issue.

[18] Subsequent to that debate, Mr Ellis has offered amendments in appropriate terms to deal with the points raised in relation to (7), (8), (9), (10) and (11), though subject and without prejudice to his primary position that he wishes to reclaim. Those amendments seem to me to deal satisfactorily with the concerns which I have upheld.