Cheques :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 1 Cheques Learning Element 4 Banking & Financial Institutions Law Everett & McCracken Sixth Edition Chapter 13


Learning Elements :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 2 Learning Elements 4.1 Define ‘cheque’ and explain the meaning of the principle words and phrases in the definition. 4.2 Distinguish between the different types of cheques. Customer’s cheques Traveller’s cheques Bank cheques Agency cheques 4.3 Identify the nature and purpose of authorised crossings on cheques. 4.4 Contrast the legal terms ‘negotiability’ and ‘transferability’.


Slide 3:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 3 4.5 Itemise the legal rights and liabilities of the parties to a cheque. 4.6 Examine the applications of the Act in relation to: Material alterations Mistake of fact Forgery Stale cheques Estoppel 4.7 outline the protection afforded to collecting and paying financial institutions.


Information – Cheque [1301] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 4 Information – Cheque [1301] While there has been over the last decade a dramatic increase in the usage of bills of exchange and promissory notes as instruments of finance in the commercial money market, the cheque remains the most familiar form of negotiable instrument and is the traditional paper form of payment method. Organisations are moving towards electronic transfer for payment, but there is still a long way to go. VU utilises this method for paying suppliers and creditors.


Slide 5:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 5 Approximately 2.3 million cheques are written per day in Australia, valued at A$7 billion. The bill market is valued at A$53 billion a day; the value of each bill is substantially higher than the average cheque, therefore approximately 530,000 bills are issued each day.


Definition of a cheque [1302] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 6 Definition of a cheque [1302] Section 10(1) of the Cheques Act 1986 defines a ‘cheque’ as: (1) A cheque is an unconditional order in writing that: Is addressed by a person to another person, being the financial institution; and


Slide 7:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 7 Is signed by the person giving it; and Requires the financial institution to pay on demand a sum certain in money. (2) An instrument that does not comply with subsection (1), or that orders any act to be done in addition to the payment of money, is not a cheque.


Slide 8:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 8 Cheques differ from bills of exchange in two respects: The drawee, must be a financial institution; and A cheque is payable only on demand, unlike bills of exchange which may be payable alternatively at a fixed or determinable future time.


Elements of a cheque :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 9 Elements of a cheque Unconditional order Addressed to another person (being a financial institution). Examples: Signed by the person giving it Order to pay a sum certain in money


Definition of a Financial Institution [1302] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 10 Definition of a Financial Institution [1302] Section 3(1) of the Cheques Act 1986 defines a ‘financial institution’ as: The Reserve Bank of Australia; or A bank within the meaning of the Banking Act 1959; or


Slide 11:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 11 A person who carries on State banking within the meaning of section 51(xiii) of The Constitution; or A person who carries on the business of Banking outside Australia.


Parties to a cheque :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 12 Parties to a cheque Drawer Drawee Payee (holder) Holder in due course


Slide 13:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 13 Common Law (Judge made law) Cheque is transferred by negotiation Person received cheque in good faith, for value and without notice of defect in the title. Cheque is negotiable and transferable.


Conditions from s50 of the Cheques Act 1986 :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 14 Conditions from s50 of the Cheques Act 1986 The cheque was negotiated to the holder. The cheque was complete and regular on the face of it. The cheque was not crossed ‘Not Negotiable’. The person must have taken the cheque in good faith and for value.


Slide 15:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 15 The cheque must be without notice of dishonour or defect in the transferor’s title. A holder in due course will receive a good title to the cheque where a holder whose title is defective negotiates it to them. Not possible for a holder to be a ‘holder in due course’ of a cheque crossed ‘Not Negotiable’.


Types of Cheques [1305 to 1308] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 16 Types of Cheques [1305 to 1308] Order cheques ‘pay P. Bell or order’ Pay P. Bell’ (crossing out ‘or bearer’ on cheque) Can be negotiated/transferred by endorsement and delivery.


Slide 17:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 17 Bearer Cheques ‘pay P. Bell or bearer’ ‘pay cash or bearer’ Can be negotiated/transferred by delivery alone. Bank cheques [1307] Bank customer’s cheques [1305] Agency cheques [1306] Travellers cheques [1308]


Bank cheques [1307] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 18 Bank cheques [1307] A bank cheque is a cheque drawn by a bank on itself, it is a bearer instrument and crossed ‘ not negotiable’. These are treated the same as ordinary cheques, the parties have the same rights, responsibilities, duties and obligations as the parties to an ordinary cheque. Since the late 19th century, bank cheques have been in common usage in Australia in circumstances where parties were anxious to ensure payment would be received.


Slide 19:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 19 A cheque drawn by a banker on itself has been considered to be virtually as good as cash. There are circumstance under which they may be dishonoured. Stolen cheques -


Agency Cheques [1306] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 20 Agency Cheques [1306] Prior to 1998, only banks were able to offer their customers the benefit of withdrawing funds by drawing cheques. Hence other non-bank financial institutions developed procedures whereby their customers were provided with a facility that had similar practical effects. These arrangements were described by the Australian Payments Systems Council as follows:


Slide 21:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 21 One, and the more common, is where financial institutions other than banks allow their customers to draw cheques on an account which these institutions maintain with a bank – these cheques are ultimately met be equivalent transfers of funds from the accounts of the customers; The other, where the drawer of the cheque maintains a cheque account with a bank which is funded, as cheques are presented, by transfers from the drawer’s account with another financial institution.


Customer’s Cheques [1305] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 22 Customer’s Cheques [1305] This type of cheque is signed by the customer as drawer upon the cheque form provide by the bank. The most common type of true cheque, which is drawn against the customer’s funds, held by the financial institution. Cheques can be dishonoured if insufficient funds are available or the customer has a pre-arranged agreement for an overdraft.


Travellers Cheques [1308] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 23 Travellers Cheques [1308] Travellers cheques are negotiable instruments they are not specifically covered under the Bills of Exchange Act, nor under the Cheques and Payment Orders Act, their standing comes from custom and usage by travellers, merchants and bankers over the past 50 years. Traveller’s cheques are similar in form to currency notes. The name of the issuing bank or financial institution appears on the cheque together with the signature of a senior officer (Bank). Traveller’s cheques are either drawn by the traveller on their bank in favour of themselves or order, or by the bank on itself.


Slide 24:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 24 The customer signs the cheques at time of issue and countersigns the traveller’s cheque at time of negotiation.   There are many legal complexities involved with travellers cheques as they are not clearly covered by any Acts, and there is little case law available in the United Kingdom or Australia on which to the assessment of possible future judgments.


Post Dated Cheques [1328] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 25 Post Dated Cheques [1328] By mercantile custom, cheques are often issued bearing a date which is intentionally not the date of issue, but is the date on, or after, which the financial institution is intended by the drawer to pay. The practice theoretically takes a post-dated cheque outside the definition of a cheque in s10 of the Cheques Act 1986 as it is clearly not payable on demand.


Slide 26:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 26 However, it has long been recognised by the common law and confirmed by statute (Cheques Act 1986, s16; compare Bills of Exchange Act 1909 s18(2)) that a cheque is not invalid by reason only that it is post-dated.


Stale Cheques :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 27 Stale Cheques A ‘stale cheque’ is one that has been drawn but not presented within fifteen months of the date appearing on the face of the cheque. s89 Cheques Act 1986 provides that where a cheque becomes stale, the duty and authority of the drawee financial institution to pay the cheque is terminated, unless there is an agreement to the contrary between the financial institution and the drawer.


Crossings [1309 to 1312] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 28 Crossings [1309 to 1312] In England in the mid 19th century; stamp duty was payable on cheques drawn to order. As a result cheques were generally drawn payable to bearer, leaving the way open to loss by theft. Apparently, in clearing house operations where cheques were allocated by collecting banks to paying banks, clerks began placing two parallel lines across the bearer cheques with words within those lines that indicated that the cheque was to be collected by a banker.


Slide 29:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 29 Bellamy v Marjoribanks (1852) 7 Exch 389; 155 ER 999 indicated the practice of placing crossings on cheques was being used by drawers. The practice and relevant liability was subsequently included in statutes: Crossed Cheques Act 1857 (NSW) Bills of Exchange Act 1909 Cheques Act 1986


Slide 30:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 30 Effect of crossings Direction to the financial institution not to pay the cheque as cash over the counter. It must be paid into an account. If loss is suffered, the bank is liable to the true owner.


Slide 31:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 31 Cheque crossed simply with two parallel lines - __________ Crossing Must be paid into an account. Remains negotiable – the person* taking the cheque receives good title to it even though the person from whom they took it may not have good title. Assignable (transferable). * Provided cheque is taken in good faith, for value and are not aware of the defect in title of the transferor. - _______ ___ _____ ____________


Slide 32:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 32 Cheques crossed ‘Not Negotiable’ Cheque must be paid into an account and not as cash over the counter. Cheque loses its quality of negotiability – person who receives the cheque cannot get a better title than the person from whom they received it. _________ _______ __________ Still assignable, i.e. transferable


Liabilities of parties to a cheque [1317 to 1327] :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 33 Liabilities of parties to a cheque [1317 to 1327] Drawer [1317] Primarily liable on the cheque. Upon presentment, the cheque will be paid. Estopped from denying to a holder in due course that the cheque was, at the time of issue, a valid cheque. If cheque dishonoured, liable to compensate the holder.


Slide 34:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 34 Endorser [1318] Upon presentment, the cheque will be paid. Liability is only to holder or subsequent endorsers. If cheque dishonoured, liable to compensate holder.


Slide 35:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 35 Strangers Has the intention of becoming liable on the cheque The person is said to ‘back the cheque’


Slide 36:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 36 Drawee (paying institution) [1319] By contract with its customers; Through the law of tort, particularly the tort of conversion which protects the property of persons from the wrongful use of that property by others; and By statute, which imposes on drawee institutions certain obligations in exchange for certain protections.


Slide 37:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 37 Collecting Bank Payee’s bank Duty – to credit the proceeds of a cheque to the account of the customer. Tortious liability – could be sued for tort of conversion either where: It receives payment for the cheque on behalf of its customer, and the customer is not the true owner; It gives value for the cheque before collecting the proceeds, and the customer is not the true owner.


Slide 38:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 38 Protection given by s95 of the Cheques Act 1986. Institution is protected provided it acted in good faith and without negligence. The collecting banker must present cheques for payment promptly under the banker customer contract. Failure to do so causes a breach of contract or an act for negligence.


Fraudulently altered amounts on cheques :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 39 Fraudulently altered amounts on cheques Dishonestly altering a cheque to increase the amount payable. Institution protected if they act in good faith and without negligence. Suspicion = negligence Debit the customer’s account for the amount for which the cheque is drawn, not the increased amount. At common law customers owe a duty of care in writing cheques.


Financial institution paying on a forged cheque :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 40 Financial institution paying on a forged cheque Obliged to pay only on its customer’s proper signature. Institution is not allowed to debit customer’s account. Institution is presumed to know the signature of their customers. Can raise estoppel as a defence – customer may be precluded from denying that the signature is genuine.


Financial institutions paying cheques contrary to crossings :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 41 Financial institutions paying cheques contrary to crossings If a financial institution pays a cheque contrary to its crossing, it will be liable to the true owner of the cheque. Defence – acted in good faith and without negligence.


Institution paying out where there is a lack of, or an irregular, endorsement :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 42 Institution paying out where there is a lack of, or an irregular, endorsement Paying institution is protected provided they acted in good faith and without negligence


Tortious Liability :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 43 Tortious Liability The financial institution may be liable to the true owner of a cheque that has been lost or stolen. The true owner is entitled to bring an action for the tort of conversion. A bank could be liable for damages if: It innocently receives a stolen cheque for collection It gives cash for a stolen cheque It pays out as drawee on a stolen cheque Paying institution is protected provided it acted in good faith and without negligence


Termination of a financial institution’s authority to pay cheques :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 44 Termination of a financial institution’s authority to pay cheques Countermand of payment (stop payment order) Notice of drawer’s incapacity Notice of drawer’s death Stale cheque


Inconsistent amounts on a cheque :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 45 Inconsistent amounts on a cheque Question Where the amount in words on a cheque differs from the amount in figures, which amount is to be paid?


Discharge of a cheque :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 46 Discharge of a cheque When it is paid by the drawee in good faith and without notice of defect in the holder’s title or that the holder had no title to the cheque. Where the holder renounces his/her rights against the drawer or persons liable on the cheque and delivers the cheque to the drawer. Where the holder cancels the cheque or the drawer’s signature.


Slide 47:Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 47 Where the cheque is fraudulently and materially altered by the holder. Discharge by payment or cancellation extinguishes all rights on the cheque.


Material Alterations :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 48 Material Alterations Section 3 (8) of the Cheques and Payment Order Act states that an alteration is material if it alters the rights, duties or liabilities of the drawer, endorser or drawee bank in respects of the cheque.   This is a general guiding principle and avoids the need to detail specific circumstances, therefore the question will be determined by the circumstances of each individual case.   Under Section 78 (2) of the Cheques and Payment Orders Act states that if a holder fraudulently and/or materially alters a cheque it will be discharged.


Mistake of Fact :Some notes reproduced from Everett & McCracken - Financial Institutions Law 6th Edition - Thompson Lawbook Co. Sydney 49 Mistake of Fact Mistake of fact is where payment was made contrary to the drawer’s instruction to stop payment; or where instructions were ambiguous; or where payment was made on an instrument bearing the customer’s forged signature; or where payment was made despite the fact that the customer did not have sufficient funds to meet the cheque. See David Securities Pty Limited v Commonwealth Bank of Australia (1992)