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Definition
A cheque is a particular kind of negotiable instrumentand 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
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Paper Payment Systems
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Definition
The Parties: The drawer (or customer of the bank)
The drawee (the bank)
The payee or bearerThe Banks
Paying Bank
Collecting Bank
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Definition
A cheque is a negotiable instrument. The features of anegotiable 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"
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Cheque Transaction
P - Paying Bank C - Collecting Bank
Debits Credits
Clearing System
Draws
A (Drawer) B (Payee)
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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
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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
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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 safeguardsto 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.
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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 orbanking usage- a/c payee only or payee a/c
only
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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
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Negotiation - Crossings
Open cheque - can pay bearer in cash
Bradleys Bank
DatePayor order
the sum of..
Signed
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Negotiation - Crossings
& Co - must be paid into a bank account
Bradleys Bank
DatePayor order
& Co
the sum of..
Signed
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Negotiation - Crossings
A/c payee can only be paid into the payees bank account,takes away the negotiability
Bradleys Bank
DatePayor order
a/c payee only
the sum of..
Signed
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Negotiation - Crossings
Not negotiable - takes away negotiability
Bradleys Bank
DatePayor order
Not negotiable
the sum of..
Signed
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Negotiation - Crossings
Crossing opened by drawer - negotiable
Bradleys Bank
DatePayor order
a/c payee only OpenCrossing A Person
the sum of..Signed
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Negotiation - Crossings
Crossing opened by drawer - negotiable
Bradleys Bank
DatePay..An Otheror order
a/c payee only OpenCrossing A Person
the sum of..Signed A Person
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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 preventnegotiation
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Negotiation - Endorsement
An Other pay A Friend
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Negotiation - Endorsement
An OtherA Friend
A Mate
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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
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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 eventualtransferee
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.
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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'sRep 187
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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 alterationLondon 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
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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 andunambiguous,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
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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
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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 branchif 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 orservices for which the cheque was drawn then the
customer will remain liable for both payment of the goods
servicesand for the dishonour of the cheque.
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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
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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 libelMarzetti v Williams (1830) 1 B & Ad 415., Jayson v
Midland Bank[1968] 1Lloyd's Rep 409 CA.
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Paying Bank
A bank is under a duty to its customers to pay chequesprovided:
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.
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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.
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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.
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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.
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Collecting Bank
The collecting bank has a duty to exercise reasonable care
and skill in collecting a cheque.
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Collecting Bank
The collecting bank has the following duties to itscustomer:
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.
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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.
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Collecting Bank
A bank cannot claim the protection when the cheque ispaid 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 ifit can show that it was not negligent.
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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] 1Lloyd's Rep 114.
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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
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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.
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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 thecustomer/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
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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 issued) 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
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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 PoliceCommissioner v Charles [1977] AC 177 HL.
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Mistaken Debit
A bank may mistakenly pay out in the followingcircumstances:
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.
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Mistaken Debit
A bankmay recover money mistakenly paid in thefollowing 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.
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Mistaken Debit
A bankwill not be able to recover money mistakenlypaid 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 bankfrom claiming the funds by raising the defence of estoppel.
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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.
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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
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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 detrimentiii)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