Unit 8: Duties, Liabilities and Protection of Bankers in Handling Bills of Exchange Payment of Cheques The legal position of a paying a cheque may be considered by looking at the contract of the bank with its customer; and the provisions of the Bills of Exchange Act Cap. 68 The legal relationships involving the paying bank may include: • That with its customer • That with some remote true owner of the cheque • That with the collecting bank

Item (iii) is covered in Unit 9. Item (i) and (ii) relates to the contract the bank has with its customer as well as the statutory provisions in the BEA. The banker therefore needs to exercise a reasonable degree of care and skill when conducting its customer’s account. The cheque must be validly signed in order for the bank to have evidence of its customer’s authority (Catlin v Cyprus Finance Corporation Ltd (1983)) to pay, (and in order for it to be covered by the BEA). By s. 2(4)a of the BEA, a cheque need not be dated at all. The paying bank has a right to insert a date under s. 19(1), although in practice, it is safer for the bank to return the cheque unpaid, stating ‘not dated’. By s.12 (2) of the BEA, a post-dated cheque is within the legal definition of a cheque as there is no contradiction with it being payable on demand – v Tottenham (1894). in practice do not honour cheques dated more than six months in the past marking them as ‘stale’, and whereas a case may be brought against the bank for dishonouring its customer’s instructions, this would be seen to be an implied term of the Banker/customer contract not to pay six months after date. In order to come within the definition, a cheque must be payable for a sum certain in money. It would be up to normal practice not to pay when the amount is stated in figures or words only. However, a discrepancy between the amount stated in words and figures can be dealt with in the following ways: • Return the cheque as an ambiguous order • Pay according to the words relying on s.8(1)d of the BEA.

Forgery of a Drawer’s Signature. If the customer’s signature on a cheque is forged, the bank has no authority to pay and, thus, will be unable to debit the customer’s account. It makes no difference that the forgery could not be detected. By s.23 of the BEA, a forged drawer’s signature is inoperative. In Tai Hing Mill Ltd v Liu Chong Hing Bank (1986) discussed in 1.7 of this module, the bank lost the case on strength that the signatures on the paid cheques were forged, although the bank argued that the customer owed a duty to the bank to take care of its cheque books and to inspect its bank statements. There is a possibility of a person knowing that his signature on a cheque has been forged, but leads others to believe that his signature is genuine. In such a situation, he will be estopped from denying the genuineness of the signature and will be fully liable on the cheque – Greenwood v Martins Bank Limited (1933). In this case G’s wife forged cheques drawn on G’s account. G discovered this but did not inform the bank. When his wife died he sued the bank for the amount of the forged cheques. G was estopped from denying the genuineness of the forged signatures and could not recover. Fraudulent Alteration It is possible that a cheque could be genuinely signed by the customer but which again has been altered or added to with regard to other material details on the cheque. Under s.63(2) of the BEA, ‘material alterations’ are:  Alterations to the amount  Date  Payee’s name,  Place for payment,  Place where it’s drawn,  Crossings,  Altering ‘order’ to bearer.

Note that whether or not the customer has drawn the cheque with reasonable care, the bank should not pay if there is an obvious alteration. It is bank practice to ask the drawer to sign next to the alteration. As for the banker and its customer, the questions a banker should ask before taking a decision should be: 1) Did the customer exercise reasonable care in drawing the cheque? 2) Was the alteration detectable by the bank? If the answer to both questions is ‘no’ then the customer bears the loss. If the answer to either is ‘yes’ the loss falls to the bank. The bank may wish to rely on the ‘estoppels’ principle, as already explained in section 8.4 above. In order to benefit from estoppel, the bank would be required to:  Show ‘representation’ or ‘conduct’ amounting to a representation, which was intended to induce a particular course of conduct by the other party to whom it was made;  The other party or person, as a result of (a), acts (or omits to act) in a particular way.  Detriment to the other person is caused. Estoppel would more likely be based on the customer’s duty to take usual and reasonable precautions to prevent forgery when he draws cheques. In the case of London Joint Stock Bank v Macmillan and Arthur (1918), M and A’s employee had the task of filling in cheque forms for signature by M or A. The employee drew a cheque payable to the firm or bearer in the sum of $2, written in figures, no words being written. After signature, the employee wrote ‘USD – One hundred and twenty’ in words and added the necessary figures. The bank was entitled to debit the account $120, basing on estoppel. An estoppel operated when the customer failed in his duty, by signing a cheque with the amount in words left in blank, and space in the figures section for the addition of more numerals.

Countermand The Bills of Exchange Act states that a bank’s duty and authority to pay a cheque are determined by countermand of payment. This implies that a customer can stop a cheque by giving notice to the bank. The moment notice is received, and before payment has been effected, this would be sufficient authority to the bank not to make payment. In Baines v National Provincial Bank Ltd (1927), B issued a cheque to X shortly before the bank’s closing time. X obtained payment from B’s bank five minutes after closing time. B attempted to stop the cheque the next morning but was unable to do so. The stop order must not be ambiguous and (the stop order) is only effective when it comes to the actual notice of the banker. In Curtice v London City and Midland Bank Ltd (1908), the notice was sent by telegram which was placed in the bank’s letter – box. When the box was emptied, the telegram was left behind. Rather incredibly, it was held that the bank was justified in paying the cheque, as it had not actually received notice of countermand at the time it paid the cheque, because it had not read the telegram. The Act does not require the notice to be in writing. However, it is normal banking practice for the banker to accept orders on telephone and then later seek confirmation of the stop order in writing. By ignoring the order given by telephone, the banker would be in breach of s.74. It is important that the customer gives notice of the stop order to the account holding branch. Where a banker ignores a valid stop notice, it would not be able to debit the customer’s account.

Wrongful dishonour It may happen that a bank declines payment of a cheque when it does not have valid grounds for doing so. Such would be unfortunate but the likely situations normally include the following:  Failing to realise the customer had removed a stop order  Wrongly believing there were insufficient funds - Marzetti v Williams (1830). In this case, sufficient cash was paid in at 1 p.m. and the payment of a cheque was refused at 3 p.m. the same day. Whereas a bank should be allowed reasonable time after the receipt of funds to the credit of an account in order to carry out appropriate book-keeping, this was held to be beyond a reasonable time and the bank was liable for breach of contract.  Forgetting than an overdraft facility had been agreed  Believing the customer had closed the account when he had not In every case the banker would be in breach of contract. If the bank does pay cash for an open cheque it cannot change its mind once it discovers there are insufficient funds. Such was the case in Chambers v Miller (1862). The payee had obtained payment and was counting the money when the cashier asked for it back. The payee declined to return it and the cashier took it from him by force. The bank was liable for assault and false imprisonment.

Statutory Protection for the Paying Bank As pointed out in section 8.3, there are provisions of the BEA that give protection to the bank in view of the risks the banker is exposed to in paying customers cheques. This protection is on two fronts: • An action for breach of contract from its customer i.e. in breach of mandate; and • An action in conversion from some third party, i.e. the bank pays the proceeds to Someone other than the true owner of the cheque.

Remedies for Breach of mandate Estoppel and Subrogation Estoppel would be a defence against debiting of a cheque bearing a signature which is not in compliance with the mandate. Possibilities include: • Estoppel arising from a misleading statement from the customer – Brown v Ltd (1964) • Estoppel arising from breach of duty of the customer – Greenwood v Martins Bank (1933); London Joint stock Bank v Macmillan and Arthur (1918); Tai Hing Cotton Mill ltd v Liu Chong Hing Bank Ltd (1985).

The right of subrogation is the right to step into the shoes of the creditor. For example the bank could be able to prove that payment by a wrongly paid stopped-cheque extinguished the debts of the customer – B.Ligget () Ltd v Bank Ltd (1928)

The Role of the Collecting Bank When the holder pays in a cheque for the credit of his account with the bank, the bank is referred to as the collecting bank. Normally upon receipt of the cheque, the bank will endorse it by stamping on it and will stamp the counterfoil which is retained by holder as receipt for the cheque. The bank then presents the cheque to the drawer’s bank for payment, usually either through the established Clearing system; Special Clearing; or where the cheque is drawn on the collecting bank/branch, the normal cheque scrutiny is done and the customer’s account credited, providing everything is found to be in order. With the continued advancement in technology and telecommunication systems, banks in the same clearing house could have their collection periods (commonly referred to as ‘clearing time’) considerably reduced to 1 or 2 days.

Remedies for Breach of mandate Mistake of fact Conversion For this remedy to be applicable, the following conditions must be proved:  Payment must not be made under mandate, for example through a forged Signature  Payment must not be a mistake of law but a mistake of fact.  Payment must be as a result of the mistake All the above conditions were satisfied in Barclays Bank Ltd v W.J.Simms, Son and Cooke (Southern) Ltd and Sowman (1979) To defeat the bank’s claim for repayment under mistake of fact the beneficiary must prove:  That the bank made a representation – Cocks v Masterman (1829)  The recipient must have relied on the representation – United Overseas Bank v Jiwani (1976)  That the beneficiary must not be at fault

Conversion is defined in, Hiort v Bolt (1874), as an unauthorised act which deprives another person of his property permanently or for an indefinite time.

The Collecting Bank as Agent A collecting bank acts as agent of the holder of the cheque, and as with any agency relationship, the banker is expected to perform the task of collecting the proceeds of the cheque with professionalism. The duty to the holder is discharged only when the cheque is physically delivered to the drawee bank for a decision on whether or not it should be paid. Following the decision on the cheque by the drawee bank, where the cheque has not been paid the collecting bank owes the customer a duty to notify him immediately. In accordance with s.49 of the BEA, for the notice to be valid, it must be given within a reasonable time of dishonour. In developed countries, reasonable would normally be deemed to be a communication to the holder within 1 day of dishonour. As for the bank, failure to execute the duties of the agency will render the bank liable for damages for breach of contract.

The Collecting Banker as a Holder in Due Course By s.28 BEA, a holder in due course is a holder who has taken a cheque: • Completed and regular on the face of it • Before it was overdue • Without notice of any previous dishonour • In good faith • For value • Without notice of any defect in the transferor’s title

For the bank it is probably unlikely for it to fail on any of the above conditions. However, The following circumstances can result in the giving of value by the bank:  Specifically allowing the holder to draw against ‘un-cleared’ effects – In A L Underwood v (1924), cheques were paid into an overdrawn account, but the Court of Appeal held that the bank was not a holder in due course, in the absence of any agreement between bank and customer that the latter could draw against the cheques before clearance. U had had a business account at the L Bank for some years when he incorporated his business into U Ltd. He maintained a personal account with the bank but opened a company account at another bank. He paid into the personal account a number of cheques which were payable to U Ltd, which he had endorsed. It was held that, notwithstanding that U Ltd was a ‘one person account’ it had to be regarded as a separate entity even if both U and the L Bank had not done so.  Specifically accepting a cheque in reduction of a facility - M’Lean v Clydesdale Banking Co. (1883)  When the cheque is paid cash before receipt of proceeds – Westminster Bank v Zang (1966). In this case, the principle in A.L Underwood (details given above), was cited. It was held that the bank had not given value as it had charged interest on the amount of the cheque pending clearance.

The Collecting Banker as a Holder for Value If a collecting bank only gives partial value, then he is a holder for value. The basic difference between the holder in due course and the holder for value is that the holder in due course has a good title irrespective of the title of the customer, whereas a holder for value has no better title than the customer. Therefore where a bank allows the customer to draw only part of the expected proceeds of the cheque before clearance, it becomes a holder for value, and could not have a better title than the customer if the cheque is subsequently returned unpaid.

Conversion and the Collecting Banker Rarely will a bank allow customers to specifically draw against un-cleared effects, nor are cheques easily accepted in specific reduction of an overdraft or loan. At the end of the day, where collection is involved, the bank will only serve as an agent for its customer, and the only risk it runs is that of conversion.

The Doctrine of Conversion was defined in section 8.8 of this module. You may wish to refer to this section to refresh your mind. But, in collecting a cheque, if the person whose account has been credited is not entitled to the proceeds of the cheque, then the true owner can sue him for conversion. Unfortunately for the bank, the true owner of the cheque will normally sue the collecting bank in its capacity as agent of the thief / pretender for the amount of the cheque.

Statutory Protection for the Collecting Bank The collecting banker is also protected by law in the execution of its duties of collecting cheques for its customers. That said, apart from them contractual relationship with its customer, the collecting bank may have a liability to, and occasionally rights against, third parties, i.e. parties to the cheque it collects. You will appreciate that a collecting bank will have no means of knowing whether the endorsement on the cheque presented by its customer for collection is genuine, particularly where the endorser in not its customer. Note that the BEA s. 79 protects the bank when: • It receives payment for a customer; or • Receives payment for itself The section does not only relate to cheques for collection, but also covers: cheques drawn - ‘pay cash’; warrants; and bankers drafts. The relevant and necessary conditions of the protection are that the bank collects the cheque: • In good faith • For a customer • Without negligence 1. Under the BEA, so long as a banker is collecting for someone who holds an account with it, it will not concern itself with the fate of the endorsement on the cheque. The bank remains covered against liability even if the account is opened with the very cheque which is in dispute – Ladbroke v Todd (1914). With the advancement in technology and telecommunications, customers can deposit cheques for collection at other bank branches where they do not necessarily hold accounts. It seems most unlikely that a bank which collects a cheque for a customer of a different bank would come within the protection of the BEA, at least if the normal procedure is Followed, whereby the bank puts the cheque into clearing directly and only a credit slip is mailed to the account holding bank. As for the issue of negligence, it might be difficult to find the bank in this situation negligent, at least, in as far as if normal banking practice is followed. The important question to ask oneself would be whether the bank took reasonable care taking into account antecedent and present circumstances.

Negligence would arise on two fronts:  Whether the bank was negligent when it opened the account  Whether the bank was negligent when it accepted a specific cheque or cheques for collection Under b) the category may further be sub-divided into: • Suspicious matters which are obvious, or ought to be obvious, from the face of the Cheque, possibly coupled with the information the bank has with the customer – Ladbroke V Todd (1914); and • Purely contextual matters which should arouse suspicion, in the absence of which, the cheque could have been safely accepted without enquiry – Nu-Stilo Footware Ltd v Ltd (1956). In this case an account was opened in a false name, the customer giving his real name as a reference. The bank obtained a satisfactory reference from the bankers of the ‘reference’. It was held – the bank had acted without negligence in opening the account.

Other Defences against Conversion If all fails and the banker is guilty of facilitating the conversion, it is possible that the bank Can consider taking up the following defences: 1) Contributory Negligence This is the defence where it is argued that the true owner has by his own actions Contributed to the fraud. The intention is for the bank to reduce on the damages it must pay to the defrauded party. In Lumsden and Co v London Trustee Savings Bank(1971), a false name account was opened by an employee of L. The name chosen Was one of the persons to whom the employer often made cheques payable. The new Customer explained that he was a self-employed chemist and gave his real name as a reference, falsely giving himself the title of Doctor. The reference obtained by the bank did not respond to the bank’s request for the name of his bank. The bank had not adhered to its internal rules and that the bank should have done more to establish Identity.

2) Holder in Due Course or Holder for Value If the collecting bank is unable to rely on the Statutory Protection, it could claim to be a holder in due course or a holder for value.

3) Ex Turpi Causa Non Oritur Actio This is not an English expression but translates as ‘out of an immoral situation, an action does not arise’. In Thackwell v Barclays (1986), S simultaneously paid two cheques into different accounts with B Bank. one of was payable to himself, which he had endorsed, and the other was payable to T and appeared to be endorsed by T. it was obvious from the comparison of the endorsements on the two cheques that they were written by the same person, and S had indeed forged T’s endorsement on the second cheque. Held- the bank could not rely on the b Statutory Protection; the circumstances of the situation were out of the ordinary and enquiries should have been made.

 Bank’s Right to Indemnity Where the bank is liable in conversion, as agent of its customer, it is entitled to a full indemnity from its customer – Hichens, Harrison, Woolston, & Co. v Jackson & Sons (1943). This might be of little value to the bank where the customer is fraudulent.