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Advise Cash Bank in each of the following scenarios:
a) Gina who for many years had held a current account at Cash Bank signs a number of blank cheque’s and leaves them with her secretary for him to use to pay her bills. The secretary uses one cheque to pay for an expensive holiday for himself and his girlfriend. THe cheque is paid by the Bank and this has the effect of making GInas account overdrawn for the first time ever. On discovering what has happened, Gina dismisses her secreatry and demands Cash Bank recredit her account with the amount of the cheque.
b) Gabby draws a cheque in favour of Hillary. The cheque is stolen from HIlary by Iris. Iris skillfully alters the name of the payee to her own name and pays the cheque into her account at Cash Bank. Iris later absconds with the proceeds of the stolen cheque. HIlary now claims the amount of the cheque from Cash Bank
c) Geri draws an ‘account payee’ cheque in favour of Jenny. The cheque is stolen from Jenny by Kay, together with Jenny’s driving licence. Kay uses the stolen driving licence to open an account in Jennys name at Cash Bank and pays the cheque into that account. Kay later absconds with the proceeds of the stolen cheque. Jenny now claims the amount for the cheque from Cash Bank
1. Gina’s Signed Blank Cheques
As a general rule a bank which pays out on a cheque drawn in favour of A to a person B, who is not entitled to be paid, my be liable to its customer for breach of the mandate to pay A, and liable also as against the true owner of the cheque (A) who may sue in the tort of conversion.
There are some circumstances in which the bank may be able to defend itself against a challenge by the customer to the debit, by reference to the customer’s behaviour. These fall into two types: (a) where the customer’s carelessness in drawing up the cheque has facilitate the making of forgery; and (b) where the customer knows of the forgery and has not informed the bank.
These estoppels preventing the customer from disputing the bank’s debit in certain circumstances, are founded on duties owed by the customer to the bank which arise from the banking relationship. In Joachimson, Atkin L J said:
“the customer, on his part, undertakes to exercise reasonable care in executing his written orders so as not to mislead the bank or facilitate forgery .”
Estoppels are an all or nothing concept they either bar the Claimant completely or will not work at all . This means that when a party relies on estoppel, any contributory negligence of the other party may not be taken into account. It operates: (a) if there is a statement of fact, or an omission to speak where there is a duty – mere silence, omission or failure to act cannot amount to a representation on which an estoppel can be based; (b) the other person relies upon that statement or its omission; and (c) he or she suffers detriment from that reliance, or the circumstances are such that it is inequitable to allow the other person to go back on what he or she has said or omitted to say.
The situation here would fall into the first category, i.e. as being a result of Gina’s carelessness. The customer has a duty to draw cheques carefully, so that fraud is not facilitated. The first of these duties of the customer goes back to the case of Young v Grote where a customer left blank signed cheques with his wife when he went away. His wife, unaccustomed to business matters, passed one to the clerk to fill out, who filed it out in such a way that he could later fraudulently raise the amount to be cashed. The court held that the “gross negligence” of the customer estopped him from claiming that the bank should not debit his account, and he was held to be liable for the loss.
The principle was accepted by the House of Lords in London Joint Stock Bank v Macmillan and Arthur. Here, one of the duties of the confidential clerk of a firm of merchants was to fill in cheques and present them to partners for signature. A partner signed one such cheque, which had not words and only figures “2.0.0” written on it. The clerk then inserted the words “one hundred and twenty pounds” and altered the figures to read “120.0”. He presented the cheque and was paid cash. The House of Lords held that the firm had been negligent and was estopped from suing the bank. The customer was bound to take usual and reasonable care in drawing the cheque to prevent forgery. If the cheque is drawn so that it invites “an increase in the amount by forgery if the cheque should get into the hands of a dishonest person, forgery is not a remote, but a very natural consequence of negligence of this description ”
It would seem that the circumstances here fit with the cases described above and on the facts it would appear that Gina has been “grossly” negligent and therefore the bank will not be liable for paying the mandates and she will not be able to recover the money from the bank as she will be estopped from doing so.
2. Iris Altering the Cheque
If a cheque has been materially altered without the assent of the customer – if , for example, the amount of the cheque has been raised – the bank will probably have no mandate to pay and therefore if they do pay it, will have to return the money to the customer and seek readdress from the person who has committed the fraud. Material alterations include: alteration of the sum payable, the date, the time or place of payment, and any crossing. There is a statutory protection for holders in due course where a bill has been altered and the alteration is not apparent, but again this special protection will not usually apply to the paying banker. A banker who pays the wrong amount is certainly liable to the customer for any excess over the amount named in the original mandate. There is a question, however, whether a banker has any mandate to pay at all to someone who is not a holder in due course when the drawer has not consented to the material alteration . Under the BOEA 1882 , the bill is “avoided”, which may mean that the cheque is “avoided as a bill of exchange” but not as a mandate, or it may mean that it is not a valid mandate either. The cases generally suggest the latter, on the ground that the effect of the instrument is wholly changed by any material alteration. If this is the case, the bank, following a material alteration to which the customer has not assented, has no mandate to pay any sum at all, other than to a holder in due course and therefore will be liable to the account holder for the value of the cheque.
3. Geri’s Crossed Cheque
The first issue that arises here is in relation to the fact that the cheque is crossed. The effect of the words “account payee only” has been strengthened by the Cheques Act 1992, which inserts a new section 81A into the BOEA 1882. Collecting banks are now required to ensure that cheques with the words account payee only are not transferable, but only valid between the parties. They should be paid in only the account of the payee of the cheque. However this does not present itself as an issue for the paying bank (cash bank) here as the cheque was, as far as Cash Bank were concerned to the correct person. Liability here is likely to arise with the collecting bank, unfortunately this appears to be Cash Bank as well!
In its role as agent of the customer, the bank is not acting on its own account and cannot claim to be a holder of the cheque in its own right. The risk that it runs of liability for conversion would make banking business impossible, and for that reason Section 4 of the Cheques Act 1957 was enacted to provide protection for collecting banks.
This section states that:
4(1) Where a banker, in good faith and without negligence, –
(a) receives payment for a customer of an instrument to which this section applies; or
(b) having credited a customer’s account with the amount of such an instrument, receives payment thereof for himself and the customer has not title, or a defective title, to the instrument, the banker does not incur any liability to the true owner of the instrument by reason only of having received payment thereof.
4(3) stipulates that “A banker is not to be treated for the purposes of this section as having been negligent by reason only of his failure to concern himself with absence of, or irregularity in, endorsement of an instrument” .
The bank must fulfil the requirements of section 4 (1) of the Cheques Act 1957 to claim protection, and it must therefore satisfy the court that it is a bank and that it has received payment for a customer , but the requirements mean that he court can consider whether the bank has acted negligently at the stage of opening an account as well as the later stage of collecting the cheque. Providing there is no problem about the above requirement the bank has then to show that it acted in good faith. There is a separate requirement from showing that it has not been negligent, but in practice, the bank is most unlikely to have any difficult in demonstrating this. It would seem that Cash Bank here acted in good faith.
The next thing that Cash Bank must establish is that they acted without negligence. Negligence is not a common law duty of care as such, but a specialised statutory form of liability for negligence. Since it takes the forma of a qualified immunity from liability at common law, the burden of proof is on the bank .
The standard of care for the bank has to be ascertained by reference to the practice of reasonable men carrying on the business of bankers and endeavouring to do so in such a manner as may be calculated to protect themselves and others against fraud . The practice of bankers is the normal guide; in the case of Marfani v Midland Bank Ltd Diplock L, said:
“What the court has to do is to look at all the circumstances at the time of the acts complained of, and to ask itself, were those circumstances such as would cause a reasonable banker, possessed of such information about his customer as a reasonable banker would possess, to suspect that his customer was the true owner of the cheque”
The standard of care, in any case, is always a matter of fact.
Negligence here would arise in the opening and carrying on an account. Although there may be no indication when the cheque is paid in that there has been a misappropriation, it may be that the bank should have made some inquiry when the account was opened which would have shed light on the transactions undertaken by the customer . When a potential customer wishes to open an account, the bank has the opportunity to make some investigation into credit worthiness and reliability, and it should seek certain information from and about that person which might help to avoid later problems. The nature of the inquires which should be made reflects banking practice, as one would expect, and accordingly has changed over time. The stringent requirements of the money laundering legislation have affected banking practice as there is more pressure on the bank to verify the identity of its customer.
The statements of the Banking Code are underpinned by money laundering regulations. It is likely that Cash Bank should have (as per money laundering regulations ) made more thorough enquiries as to the identity of Kay. It would seem obvious that whilst she may have had a driving licence to open the account, this was either not a photographic licence, or it was and they did not see Kay in order to check that she matched the photograph. No investigations were made into her credit history and it would seem no enquiry of her address, therefore this would suggest that Cash Bank were negligent in opening the account without making proper investigations. Cash bank will therefore be liable to Gina for the amount of this cheque or possibly to Jenny in the tort of conversion.
- Commissioners of Taxation v English Scottish and Australian Bank AC 683
- Flanagan v National Bank Ltd (1938) 72 I LT 63
- Imperial Bank of Canada v Bank of Hamilton [1903[ AC 49 Pc
- Knill v Willams (1809) 10 East 431
- Ladbroke v Todd (1914) 30 T Lr 433
- Lloyds Bank v Savoy  A C 201
- London Joint Stock Bank v Macmillan and Arthur  AC 777
- Marfani v Midland Bank Ltd  1 W LR 955
- Suffell v Bank of England (1882) 9 Q B D 555
- Young v Grote (1827) 4 Bing
- Bills Of Exchange Act 1882
- Cheques Act 1957
- Cranston R, (2002) “Principles of Banking Law”, Oxford University Press
- Ellinger E, Lomnicka E & Hooley R, (2002) “Modern Banking Law”, Oxford University Press
- Penn G & Wadsley J, (2002) “The Law and Practice of Domestic Banking”, Sweet and Maxwell
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