Professional Documents
Culture Documents
A cheque is a particular kind of negotiable instrument and is defined as: a signed unconditional order in writing addressed by a person to his or her banker, requiring the banker to pay on demand a sum certain in money to, or to the order of, a specified person
Definition
The Parties: The drawer (or customer of the bank) The drawee (the bank) The payee or bearer The Banks Paying Bank Collecting Bank
Definition
A cheque is a negotiable instrument. The features of a negotiable instrument are (Bills of Exchange Act 1882 (B of EA 1882 s 3): 1. Title passes by delivery, 2. A holder can sue in his or her own name, 3. A transferee taking in good a faith and for value can obtain a good title even if the previous holder did not, provided: There has been no forgery and Negotiability is not restricted e.g. crossed "a/c payee only"
Cheque Transaction
P - Paying Bank Debits C - Collecting Bank Credits
Clearing System
Draws A (Drawer)
B (Payee)
Negotiation
A cheque or other negotiable instrument is a debt. A debt is a chose in action, it is intangible and it not paid can only be sued upon. A negotiable instrument is a chose (thing) in action (can be sued on) compare with a chose in possession which can be passed by handing over the actual item e.g. a chair
Negotiation
Negotiation means that a cheque or other negotiable instrument can be passed from one person to another - in effect the holders are passing a debt from one to another
Negotiation - Crossings
Cheques are of two types open & crossed Ocs are those which are paid over the counter of the bank. (need not be put through a bank account) great risk,Protection safeguards to payment through an account in the bank. No effect on--- A crossing tells the holder of a cheque that it can or cannot be negotiated. It appears on the face of the cheque. Now most cheques are crossed so as to prevent negotiation.
Modes of crossing
General crossing-(sec.123) Special crossing (Sec124) it requires the name of the banker to be added across the cheque either with or without the words not negotiable. More safer Restrictive crossing- commercial or banking usage- a/c payee only or payee a/c only
Cont.
Not Negotiable crossing (sec.130) A cheque may be crossed with words not negotiable on it. Get no better title than that of his transferor and can not transfer better title
Negotiation - Crossings
Open cheque - can pay bearer in cash Bradleys Bank Date
Negotiation - Crossings
& Co - must be paid into a bank account Bradleys Bank Date
Negotiation - Crossings
A/c payee can only be paid into the payees bank account, takes away the negotiability Bradleys Bank Date
Negotiation - Crossings
Not negotiable - takes away negotiability Bradleys Bank Date
Negotiation - Crossings
Crossing opened by drawer - negotiable
Payor order a/c payee only OpenCrossing A Person the sum of.. Signed
Negotiation - Crossings
Crossing opened by drawer - negotiable
Bradleys Bank Date Pay..An Other or order a/c payee only OpenCrossing A Person the sum of.. Signed A Person
Negotiation - Endorsement
Endorsement is a record of the negotiation and is on the back of the cheque - this is now rare as most cheques are crossed so as to prevent negotiation
Negotiation - Endorsement
Negotiation - Endorsement
Holders of a Cheque
A holder is defined as the payee or indorsee who is in possession or the bearer of it s 2 B of EA 1882 A person is a holder in due course if they take a cheque (B of EA 1882 s 59): - complete and regular on the face of it; - before it is overdue - without notice of previous dishonour - in good faith and for value - without notice of the transferor's title
Forgery
Forgery of the drawer or endorser's signature renders the cheque inoperative. It makes no difference if the forgery could not be detected s24 B of EA 1882. Parties before the forgery are not liable to the eventual transferee Parties after the forgery are liable to the transferees after the forgery and therefore the original victim of the forgery will usually be the loser.
Forgery
If a customer fails to inform a bank of a forgery then the customer may be estopped from suing the bank for paying out on the forgeries. Under equitable estoppel the customer by not telling the bank about the forgeries will have made an assurance to the bank that the bank need not take action against the forger. The bank in reliance will have not have taken action against the forger and therefore will have acted to its detriment. Greenwood v Martins Bank [1933] AC 51 HL & Brown v Westminster Bank [1964] 2 Lloyd's Rep 187
Forgery
Where a cheque has been materially altered by adding words or figures to increase the amount or changing the name of the payee it will be void s 64 B of EA 1882. However a customer must take reasonable precautions to prevent an alteration London Stock Bank v Macmillan & Arthur [1918] AC 777 HL; Young v Grote (1827) 4 Bing 253; Slingsby v District Bank [1932] 1 KB 544 CA
Countermand
S.75 Bills of Exchange Act 1882 states that a bank's duty to pay a cheque is ended by a countermand (stop) of payment. The order to stop a cheque must be clear and unambiguous, Baines v National Provincial Bank (1927) 96 LJKB 801. In particular they should refer to the number of the cheque, which is a unique feature of the document. Westminster Bank v Hilton (1926) 136 LT 315 HL.
A stop is not effective until it actually comes to the direct attention of the bank. Curtice v London City & Midland Bank [1908] 1 KB 293 CA
Countermand
No requirement that the stop be in writing but bank will require confirmation in writing if by telephone. One of the joint holders of an account may stop a cheque but both need to lift it.
A payee cannot stop payment of a cheque only the drawer if lost or stolen.
A drawer customer can stop payment of a cheque up to the close of business on the day of presentation. An "open" cheque cannot be stopped after the cash has been handed to the presenter. Chambers v Miller (1862) 13 CBNS 125
Countermand
Bank liable if pays a cheque outside normal banking hours and a stop instruction is received before opening next day Baines v National Provincial Bank (1927) 96 LJKB 801
Stop instruction applies to all accounts at the same branch if a specific account is not specified. Burnett v Westminster Bank [1966] 1 QB 742 If a customer stops payment of a cheque because of a dispute over payment or dissatisfaction with goods or services for which the cheque was drawn then the customer will remain liable for both payment of the goods services and for the dishonour of the cheque.
Countermand
S.75 Bills of Exchange Act 1882 states that a bank's duty to pay a cheque is ended by a countermand (stop) of payment.
The order to stop a cheque must be clear and unambiguous, Baines v National Provincial Bank (1927) 96 LJKB 801. In particular they should refer to the number of the cheque, which is a unique feature of the document. Westminster Bank v Hilton (1926) 136 LT 315 HL. A stop is not effective until it actually comes to the direct attention of the bank. Curtice v London City & Midland Bank [1908] 1 KB 293 CA
Wrongful Dishonour
A bank will wrongfully dishonour a cheque if it fails to pay: on an unstopped cheque, or when the account is in funds in erroneous the belief that: it is overdrawn or has exceeded an authorised overdraft facility or is closed. The bank may be sued for breach of contract and libel Marzetti v Williams (1830) 1 B & Ad 415., Jayson v Midland Bank [1968] 1Lloyd's Rep 409 CA.
Paying Bank
A bank is under a duty to its customers to pay cheques provided: a) the cheque is technically in order; b) there is no legal bare to payment e.g. death of customer; c) funds are available; d) cheque not countermanded; e) bank not put upon enquiry. A paying bank may need protection against two possible actions: an action for breach of contract from its customer; and an action in conversion from some third party who is the true owner of a cheque.
Collecting Bank
The collecting bank has a duty to exercise reasonable care and skill in collecting a cheque.
Collecting Bank
The collecting bank has the following duties to its customer: a) to present a cheque for payment with in a reasonable time; b) to adhere to current banking practice;
c) if a cheque is dishonoured to notify its customer on the same day that it is aware of the dishonour;
d) Its responsibility is not discharged until the cheque in favour of its customer is delivered to the branch upon which it is drawn. Can now be done electronically s1 Deregulation and Contracting Out Act 1994 Regulations SI 1996/2993.
Collecting Bank
S. 4 Cheques Act 1957
Where a banker:
a) in good faith, and b) without negligence
either
receives payment for a customer of any cheque or
credits a customer with the amount of such cheque and receives payment, the bank will not be liable to the owner of the cheque if the customer had no title to it.
Collecting Bank
A bank cannot claim the protection when the cheque is paid into and collected by a different branch of the same bank since the collecting bank is not receiving payment for a customer. LLoyds Bank Ltd v Savory [1933] 2 KB 122 CA
Good faith is rarely an issue. However the issue of negligence has been considered. The Bank is actually liable in conversion for paying out on the drawer's cheque but by virtue of the statute may be able to escape liability if it can show that it was not negligent.
Collecting Bank
Negligence may arise as follows:
When opening an account Hampstead Guardians v Barclays Bank Ltd (1923) 29 TLR 229 ,
Collecting Bank
Negligence may arise as follows: Negligence in collecting the cheque Orbit Mining and Trading Co Lyd v Westminster Bank Ltd[1963] 1 QB 794 CA, A.L.
Underwood Ltd v Bank Of Liverpool and Martins [1924] 1 KB 755 CA, Morison v London County and Westminster Bank Ltd [1914] 3 KB 356, Midland Bank Ltd v Reckitt[1933] AC 1HL, Motor Traders Guarantee Corporation Ltd v Midland Bank Ltd [1937] 4 All ER 90, Thackwell v Barclays Bank Ltd[1986] 1 All ER 676, Penmount Estates Ltd v National Provincial Bank Ltd (1945) 173 LT 344
Mistaken Debit
A bank may mistakenly pay out in the following circumstances: a) A bank pays a forged cheque; b) A bank pays a stopped cheque; c) A bank pays a cheque with insufficient; d) A bank pays an altered cheque; or e) A bank makes the same payment twice.
Mistaken Debit
A bank may recover money mistakenly paid in the following circumstances: a) The bank pays the money to the wrong person by mistake. Negligence is irrelevant . Barclays Bank Ltd v W. J. Simms, Son & Cooke (Southern) Ltd [1980] QB 677
Mistaken Debit
A bank will not be able to recover money mistakenly paid in the following circumstances: 1) It would have paid the cheque even if it had realised the true situation; (very unlikely) 2) Where the holder receiving payment could stop the bank from claiming the funds by raising the defence of estoppel.
Mistaken Debit
To prove Estoppel it must be shown:
International Ltd [1975] QB 654 A payee cannot act in good faith here and a drawer cannot be acting in good faith if the cheque has been legitimately countermanded. (iii) The holder receiving payment acted to his or her detriment as a result of receiving the payment.
Mistaken Credit
Where a bank has mistakenly credited an account it may re-debit the account or reclaim funds withdrawn . Customer may claim estoppel Estoppel may be claimed by a customer
Mistaken Credit
Estoppel may be claimed where: