Definition

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

Paper Payment Systems

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

Payor order the sum of.. Signed

Negotiation - Crossings
& Co - must be paid into a bank account Bradleys Bank Date

Payor order & Co the sum of.. Signed

Negotiation - Crossings
A/c payee can only be paid into the payees bank account, takes away the negotiability Bradleys Bank Date

Payor order a/c payee only the sum of.. Signed

Negotiation - Crossings
Not negotiable - takes away negotiability Bradleys Bank Date

Payor order Not negotiable the sum of.. Signed

Negotiation - Crossings
Crossing opened by drawer - negotiable

Bradleys Bank Date

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

An Other pay A Friend

Negotiation - Endorsement

An Other A Friend A Mate

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

There is no requirement that the stop should be in writing

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.

Statutory Protection for Paying Banks

S. 60 Bills of Exchange Act 1882 The paying bank is protected from liability if it pays out on an open or crossed cheque with forged or unauthorised endorsements provided it does so: a) in good faith, and b) in the ordinary course of business.

Statutory Protection for Paying Banks

S. 1 Cheques Act 1957 The paying bank is protected from liability if it pays out on an open or crossed cheque with no endorsement or an irregular endorsement provided it does so: a) in good faith, and b) in the ordinary curse of business.

Statutory Protection for Paying Banks

S. 80 Bills of Exchange Act 1882 The paying bank is protected from liability if it pays out on a crossed cheque to a person as the true owner even if that person is not in fact the true owner provided it does so: a) in accordance with the crossing, and b) in good faith, and c) without negligence.

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 ,

Nu-Stilo Footwear Ltd v Lloyds Bank Ltd(1956) 7 ldb 121,

Marfani & Co Ltd v Midland Bank Ltd[1968] 1 WLR 956 CA, Lumsden & Co v London Trustee Savings Bank [1971] 1 Lloyd's Rep 114.

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

Cheque Guarantee Cards

A bank is never liable on a cheque. The purpose of a cheque guarantee card is to create a collateral contract under which the bank agrees to undertake to pay the holder of the cheque the lesser of: its value or a fixed amount e.g. 50.

Cheque Guarantee Cards

It was found necessary to introduce the cards to ensure those who would not otherwise accept a cheque would, with the bank's guarantee, agree to do so. The contract is made between the bank and the payee with the customer/drawer acting as the bank's agent. However due to the risk of fraud the amount of the guarantee is limited. Withdrawals of cash are limited to one per day.
The standard conditions for guarantees by the bank are: a) The cheque is drawn for an amount within the limit stated on the cared in settlement of one transaction only b) The cheque has the same name and code number as the card

Cheque Guarantee Cards

The standard conditions are: The cheque is:

a) Drawn for an amount within the limit one transaction only

b) Same name and code number as the card c) Dated with the date of issue

d) Issued and dated before the card's expiry date

e) Signed in the presence of the payee and the signature agrees with that on the card And f) The payee writes the card number on the back of the cheque g) The card has not been altered or defaced First Sport Ltd v Barclays Bank [1993] 1 WLR 1229 CA

Cheque Guarantee Cards

If the customer doe not have enough money in the account then he or she is liable to the bank who must honour the cheques.Could be a criminal offence: Metropolitan Police Commissioner v Charles [1977] AC 177 HL.

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

b) The bank had no authority to make the payment

c) The bank has paid another bank as collecting agent for the payee and the payee has withdrawn the funds. d) The funds have passed through a mixed fund. e) The bank has failed to act sufficiently promptly but only applies if did not receive notice that the cheque would be dishonoured. - Cocks v Masterman (1829) 9 B & C 902.

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:

i) The bank made a representation that it would pay.

ii) The holder receiving payment has changed his or her position; and acted in good faith - estoppel is an equitable remedy - National Westminster Bank Ltd v Barclays Bank

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:

i) the bank has made a representation of fact

ii) the customer must have relied upon the representation and acted to his or her detriment

iii)the customer acted in good faith

Lloyds Bank Ltd v Brooks (1951), United Overseas Bank v Jiwani [1976] 1 WLR 964

Avon County Council v Howlett [1983] 1 WLR 605 CA,

Scottish Equitable v Derby [2001] 2 All ER (Comm) 274 CA