ABE Principles of Business Law 2008

Negotiable Instruments 2: Cheques 415

(b)If the alteration was not apparent but was not facilitated by negligence on the part of the customer in drawing the cheque, then the customer will be chargeable with the original amount but the bank must bear the excess.

So far, the position is comparable to the general rule of bills of exchange; however:

(c)If the alteration was not apparent and was made possible through the careless way in which the customer drew the cheque, then the loss will fall on the customer.

In London Joint Stock Bank v. Macmillan & Arthur (1918), a bearer cheque was drawn for £2 in figures, but with sufficient space for this to be changed to £120 without the alteration being apparent, and without the amount being written in words at all, so that a fraudulent clerk was able to write in "one hundred and twenty pounds". It was held that the customer had to accept the full charge of £120 when the cheque was met.

The case of Slingsby v. District Bank (1931) may also be noted in this context. The drawer left a gap between the inserted name of the payee and the printed words "or order", into which gap one Cumberbitch inserted the words "per Cumberbitch and Potts". He then endorsed the cheque and obtained payment. It was held that this did not constitute negligence on the part of the drawer so that the bank had to bear the loss.

Acting in excess of authority created by the relationship can give rise to criminal liability, as in the case of R v. Charles (1976). C had authority to overdraw his account up to £100 and he also had a cheque card which contained an undertaking by the bank that any cheque not exceeding £30 would be honoured subject to the usual conditions. In the course of one evening at a gambling club, C drew 25 cheques for a total of £750. He was convicted under the Theft Act 1968 of dishonestly obtaining a pecuniary advantage for himself by deception. In the course of judgment, it was said that, where the holder of a cheque card presents the card together with a cheque made out in accordance with the conditions of the card, it is open to the court to infer that a representation has been made by the drawer that he has the authority as between himself and the bank to use the card in order to oblige the bank to honour the cheque. If that representation is false and the payee has been induced to accept the cheque by reason of that false representation, the drawer has thereby obtained a pecuniary advantage by deception.

Greenwood v. Martins Bank Ltd (1933) illustrates how the bank will be protected in the event of the customer's negligence. Greenwood's wife had been drawing money from his account by forging his signature on his cheques. In order to protect his wife, he did not inform the bank. The wife later committed suicide and he then decided to sue the bank for the return of the money.

HELD: The husband was under a duty to disclose what had happened, and as he had failed to do so his conduct precluded him from alleging the forgery.

An important case showing the limit of the customer's duty to his bank was decided by the Privy Council in Tai Hing Cotton Mill v. Ling Chong Hing Bank (1985), where the bank had over a period of time paid out on cheques that had been forged by an employee of the appellant company. The total involved was in excess of $5 million and the fraud had continued for some considerable time. The bank argued that the appellant customer company had been negligent because they had received bank statements over the period which showed that the bank had been paying out on the forged cheques. The customer should have noticed the errors and informed the bank. Since it had not done so it was negligent and, the bank argued, that it should bear the loss.

The Privy Council held that the customer did not owe a duty to inform the bank of errors on bank statements unless it was expressly agreed. If the customer actually knew about the forgeries then he had to tell the bank but he was not under any duty to take steps to find out

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about the forgery by, for example, checking the accuracy of his bank statements. Therefore the bank was held liable to bear the loss. The case shows how the law, when it comes to cases between banks and their customers, tends to side with the customer, presumably on the basis that the bank is more able to bear the loss.

In the absence of express contractual terms, there has been a general unwillingness on the part of the courts to further extend the duties of customers to their banks in the way in which customers operate their accounts – see Patel v. Standard Chartered Bank (2001).

D. CROSSING A CHEQUE

Purpose of Crossings

The Bills of Exchange Act 1882 makes provision for the "crossing" of cheques, and this provision does not apply to any other type of bill of exchange.

The effect of a crossing is that the cheque may be met only by payment to a banker, and cannot be cashed over the counter of the paying bank. The object of this is that it is thus possible for the drawer of the cheque to trace it after it has been paid through a bank account, to a known holder. Also, it gives more time to countermand payment.

The crossing does not initially affect the negotiability of the cheque, nor does it mean that the cheque must be endorsed.

General and Special Crossings

There are two types of crossing – "special" and "general".

Special Crossing

In a special crossing, the name of a particular bank is written between the lines of the crossing, e.g. Barclays; a cheque bearing a special crossing must be met only by payment to that particular bank, i.e. Barclays.

General Crossing

A general crossing is made by drawing across the face of the cheque two parallel lines with or without the words "and company", or any abbreviation thereof, e.g. "& Co.". The original intention was that the payee could insert the name of his/her bank, making it a special crossing, but the bank usually does this by stamping its name on the crossing.

The crossing must appear on the face of the cheque and it is desirable that it should be across the middle of the document.

Examples of special crossings are:

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(4)Where a cheque is crossed generally or specially, the holder may add the words 'not negotiable'

(5)Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker for collection.

(6)Where an uncrossed cheque, or a cheque crossed generally is sent to a banker for collection, he may cross it specially to himself."

Once a cheque has been crossed, the crossing can be "opened" only on the authority of the drawer.

Following the introduction of the Cheques Act 1992, the major clearing banks changed the standard format of their cheque books so that they are now pre-printed with the "Account Payee" crossing and, in some cases, the word "only" on the payee line replacing the words "or order".

Let us now consider the position of the paying bank in relation to crossed cheques. Quite simply, it is bound to pay in accordance with the crossing, and S.79, Bills of Exchange Act 1882 provides that a banker who pays a crossed cheque otherwise than in accordance with the crossing will be liable to the true owner of the cheque for any loss the latter may incur by reason of the banker's default.

Where, however, a crossing has been obliterated or altered without this being apparent, a banker who pays in good faith and without negligence within the apparent terms of the cheque will not incur any liability under S.79.

E. SPECIAL PROTECTION OF PAYING BANKER

The Bills of Exchange Act 1882 and the Cheques Act 1957 between them provide special protection for bankers paying and collecting cheques.

If the paying bank meets a cheque without discharging it, so that the true owner is able to claim the cheque and demand payment him-/herself, the bank will be liable to the customer in conversion in respect of the first payment and will have to bear the loss.

A relevant case is that of National Westminster Bank v. Barclays Bank International Ltd. and Another (1974). During a burglary, a cheque was stolen from the cheque book of X, a customer of the National Westminster Bank. Subsequently, he learned that his account had been debited with a cheque for £8,000, which had been collected by Barclays Bank and credited to the second defendant, one of their customers. The claimants admitted that the cheque had been forged and that they were not entitled to debit it to X's account. They brought an action to recover the £8,000 from the defendants as money paid under a mistake of fact. It was contended by the second defendant that the claimants were prevented from recovering the £8,000 since their action in honouring the cheque amounted to a representation that it was genuine. This plea was rejected. It was held that, merely by honouring a forged cheque without negligence, the claimants had not impliedly represented to the payee that the signature was genuine so as to prevent recovery from him.

Bank as Customer's Agent

Protection is, however, afforded under S.1, Cheques Act 1957. In order to discharge a bill, payment must be made to "the holder" defined as "the payee or endorsee of a cheque who is in possession of it, or the bearer thereof". Where a cheque is paid in by a customer to his/her bank for collection, this will not normally constitute a "negotiation" of the cheque, for the banker does not purport to be a holder but acts as agent for the customer.

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Bank as Holder

In some circumstances, however, the collecting bank does not act as a mere agent, but as a holder in its own right, namely in the following cases:

The cheque is paid in to reduce the customer's overdraft.

The bank credits the customer's account before the cheque is cleared, and there is an express or implied agreement between the parties that the customer can draw against such cheques before they are cleared.

In such cases, if the cheque is payable to the customer and he/she is not required to endorse it before it is paid in, payment by the drawee bank to the collecting bank will not discharge the cheque because the latter will not come within the definition of a holder. Of course, where the collecting bank is merely acting as an agent, the endorsement of the holder of the instrument is not required for payment by the drawee to discharge it, but, since the paying bank cannot know of the circumstances in which the cheque is paid in by the customer, it was the practice prior to the Cheques Act 1957 to refuse to meet any cheque not endorsed by the payee.

Endorsement when Paying In

The practice of endorsement was extremely inconvenient, and both the business and banking communities pressed for measures to render it unnecessary. As a result, S.1, Cheques Act 1957 was enacted, providing that

"Where a banker in good faith and in the ordinary course of business pays a cheque drawn on him which is not endorsed or is irregularly endorsed, he does not, in doing so, incur any liability by reason only of the absence of, or irregularity in, endorsement, and he is deemed to have paid it in due course."

Notwithstanding their objection to the endorsement of cheques as a general practice, however, the committee of London Clearing Banks subsequently announced that, as a matter of practice, banks would still require the endorsement of cheques in the following cases:

(a)If the payee (or endorsee) presents it to the bank on which it is drawn for payment over the counter, his/her endorsement will be required.

(b)If the cheque is paid in for the credit of an account other than that of the payee or last endorsee, the endorsement of the payee or last endorsee will be required. (Under the wide drafting of the section, intermediate endorsement also could be missing and the protection would still apply.)

But where the payee pays in the cheque for the credit of his/her own account, his/her endorsement will not be required; equally, in case (b) above, the endorsement of the person to whose account the cheque is to be credited will not be required.

The effect of this announcement is that, if a bank pays a cheque in the stipulated circumstances without requiring the endorsement specified, the cheque would not be paid "in the ordinary course of business" and the protection would not apply.

In Lumsden and Co. v. London Trustee Savings Bank (1971) damages for conversion were reduced by apportionment under the Law Reform (Contributory Negligence) Act 1945. A clerk employed by the claimants opened an account at the defendants' bank in the fictitious name of John Arthur George Brown, the defendants failing fully to carry out their own procedure for checking on new customers. The clerk then converted cheques properly drawn on the claimants’ business to the name of J A G Brown, paid them into his account, and eventually absconded with the proceeds. When sued in conversion the bank pleaded the statutory defence of S.4(1), Cheques Act 1957 and in the alternative contributory negligence.

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(b)The bank must be acting for a customer. The person for whom the cheque is collected must have an account with the bank, though it would probably be sufficient if the account were opened only with the disputed cheque.

(c)The following guidelines have been laid down by the Courts in order to determine whether the bank has been negligent and thereby loses the protection of S.4,

Cheques Act 1957 or S.80, Bills of Exchange Act 1882. The rules were decided upon in the case of Marfani v. Midland Bank (1968).

The standard of care required of banks is that of the ordinary careful banker.

The duty, however, does not extend to the thorough examination of accounts.

If negligence is alleged in relation to a bank receiving a cheque and collecting money for it, the court must look carefully at the circumstances in which the bank accepts customers and opens new accounts.

The burden of proving that he/she acted without negligence is on the defendant. It has been held that the bank is negligent in the following circumstances.

(i)If the bank opens an account without enquiring as to the identity of the customer (Lumsden & Co. v. London Trustee Savings Bank (1971)).

(ii)If it fails to scrutinise the customer's accounts occasionally to see if they are proper and correct (Lloyds Bank v. Chartered Bank of India (1919)).

(iii)If it receives payment for a customer when the cheque is drawn either in favour of the customer's employer (Underwood v. Martins Bank (1924)), or when the cheque is drawn in favour of a third party and the bank fails to enquire into the customer's title to the cheque (Lloyds Bank v. Savory (1933)).

Collecting Bank as Holder in Due Course

As we have already noted, the banker normally acts as an agent of the customer, but in certain circumstances, he will be regarded as a holder in his own right. In these cases, provided he satisfies the conditions of a holder in due course he will be able to avoid any liability in conversion on this ground.

In this connection, it should be noted that, just as S.1, Cheques Act 1957 provided statutory protection for the paying bank even if the cheque was not endorsed by the customer to the collecting bank, S.2 preserves the rights of the collecting bank as a holder in due course.

Without the endorsement of the customer paying in the cheque (being an order cheque) for collection, the banker will not be a holder within the definition of the Bills of Exchange Act (since he/she is not the payee or endorsee), but by S.2, Cheques Act 1957, the cheque will be deemed to have been endorsed in blank so that the collecting bank meets the definition as a bearer.

S.4 gives much wider protection, and a banker cannot claim as holder in due course if there is a forged endorsement on the cheque. On the other hand, in the appropriate circumstances, the banker may be able to claim as a holder in due course even if he/she has been negligent (which negligence would lose him/her the protection of S.4).

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G. PROMISSORY NOTES

Definition

S.83, Bills of Exchange Act 1882 states:

"(1) A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of, a specified person or to bearer.

(2)An instrument in the form of a note payable to maker's order is not a note within the meaning of this section unless and until it is endorsed by the maker.

(3)A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof.

(4)A note which is, or on the face of it purports to be, both made and payable within the British Isles is an inland note. Any other note is a foreign note."

Where a promissory note specifies payment at a particular place, presentment at that place is necessary to render the maker liable.

In Re British Trade Corporation Ltd (1932) it was held that the document, though in the form of a bill of exchange, had the same drawer and drawee. If treated as a promissory note, it would require to be presented for payment if it was "in the way of it made payable at a particular place". In this case, the place for payment was not inserted in the body of the note. Consequently, time began to run under the Statute of Limitations from the date of the note.

The following is a specimen of a promissory note payable on demand.

London, 30 April 2008

£75.20

On demand I promise to pay at the English Bank Limited,

Chelmsford, to A Smith or order, the sum of Seventy Five

Pounds and Twenty Pence only for value received.

J Brown

An IOU, as generally understood, is not a promissory note, since it does not strictly contain any promise to pay, and in this form it does not constitute a negotiable instrument.

Necessity of Delivery

"A promissory note is inchoate and incomplete until delivery thereof to the payee or bearer" (S.84).

No precise form is necessary for a promissory note, but the essential feature is that there must be an unconditional promise in writing to pay a certain sum in money. In a similar manner to a bill of exchange, the note must not be made payable on a contingency, although a note may contain a pledge of collateral security with authority to sell or dispose thereof.

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