Unit 8: Duties, Liabilities and Protection of Bankers in Handling Bills of Exchange Payment of Cheques The legal position of a bank 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 London 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 – Royal Bank of Scotland v Tottenham (1894). Banks 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.