CHAPTER 7 CHEQUES AND ASSOCIATED TRANSACTIONS  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

THE NEMO DAT RULE The rule provides that a buyer of goods cannot obtain a better title (ownership) to goods than that of the seller Goods are transferred subject to defects in ownership How does this rule apply to cheques ? Some types of cheques – eg cheques marked N0T NEGOTIABLE – are not capable of being legally transferred to another after the cheque has been stolen  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

A SAMPLE CHEQUE / AGENCY CHEQUE  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

CHEQUE CROSSINGS Crossings are simply instructions to the bank/financial institution written on the face of a cheque These include both legally recognised crossings and crossings of a general commercial nature and include: 1 Two parallel transverse lines 2.Two parallel transverse lines with not negotiable written inside 3 The words “Account payee only” Banks can be liable for negligence/breach of contract if they fail to obey any crossings or other instructions  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

PARTIES TO A CHEQUE the drawer: the person who writes the cheque the drawee: the person to whom the cheque is addressed the payee: the person to whom the drawee is directed by the cheque to make payment the indorser: any other person who signs the cheque the bearer: the person in possession of a cheque  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

CHARACTERISTICS OF A CHEQUE The Act requires a cheque to have certain characteristics. If it lacks any one of these it is not a cheque. This is important because the Act gives certain protections to financial institutions in the case of a cheque but these protections do not apply to bills of exchange.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

CHARACTERISTICS OF A CHEQUE CONT… It must be in writing It must be an unconditional order (no conditions attached) It must be addressed by a person to a financial institution (“FI”). It must be signed by the person giving it or by an authorised signatory on their behalf It must order the “FI” to pay on demand a specific sum/amount of money The nominated sum must be certain. If the words and figures differ, the “FI” pays the lesser amount  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

ORDER CHEQUES A cheque is payable to order if, either originally or by indorsement, the drawee bank is instructed to pay the cheque to or to the order of a person or persons. Examples “Pay Mary Brown” “Pay Mary Brown or order” “Pay to the order of Mary Brown”  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

BEARER CHEQUES Cheques not payable to order are bearer cheques and the bank’s obligation is to pay the bearer Examples “Pay bearer” “Pay Mary Brown or bearer” “Pay cash” Usual printed cheques contain space to insert the payee’s name which is followed by the printed words “or bearer”. Left as it is, this is a bearer cheque - Some banks now give account holders the option of having the printed forms made payable to order.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

THE MESSAGES ON A CHEQUE Payable to bearer Payable to order Crossings Not negotiable crossing Account payee only Messages written on a cheque are simply instructions to the financial institution on what to do when the cheque is presented  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

PAYABLE TO BEARER A cheque payable to bearer authorises the paying bank to pay the cheque to the bearer at the time The paying bank does not have to confirm that the bearer is the owner of the cheque A bearer cheque also informs intending holders of the cheque that it is negotiable by delivery Bearer cheques may be legally transferred by delivery only  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

PAYABLE TO ORDER A cheque payable to order instructs the paying bank to only pay the cheque to the drawee or an indorsee It also advises intending holders of the cheque that the cheque is negotiable by delivery and indorsement (signing) The collecting bank should also take care to collect the cheque only on behalf of the payee or a lawful indorsee  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

CROSSING ON A CHEQUE One type of crossing consists of two parallel transverse lines This instructs the paying bank to only pay the cheque into a bank account or to another bank The paying bank must “not pay cash”  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

NOT NEGOTIABLE CROSSING Not Negotiable The words not negotiable written inside two transverse parallel lines across the face of a cheque reimpose the nemo dat rule and make the cheque assignable BUT no longer negotiable. It warns all persons dealing with the cheque that they cannot get a better title than the transferor has and that they take the cheque “subject to all defects in title” (ownership) if the cheque has been stolen.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

ACCOUNT PAYEE ONLY The words “account payee only” added to a cheque do not impose any contractual duty on the collecting bank because there is no contract between the drawer and the collecting bank However, a collecting bank that ignores this message may be guilty of negligence toward the true owner of the cheque A prudent bank would make inquiries if it was asked to collect the cheque on behalf of someone other than the payee Recent changes to banking regulations now prevent financial institutions from depositing cheques NOT in the name of the account holder. Thus this crossing will be used less frequently A/c Payee only is NOT a statutory crossing, but one acceptable by usage  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

HOLDERS IN DUE COURSE OF A CHEQUE Section 50(1) of the Cheques Act 1986 provides that a holder in due course is a holder to whom the cheque was negotiated where, at the time of negotiation, the cheque: –was complete and regular on the face of it; –was not stale (15 months old); and –did not contain a “not negotiable” crossing on the face of the cheque. The holder took the cheque: in good faith; for value (personally exchanging value for the cheque); and without notice of any dishonour of the cheque or defect in the transferor’s title.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

HOLDERS IN DUE COURSE OF A CHEQUE CONT… A holder who takes a cheque from a holder in due course, without notice of any fraud or other illegality, has all the rights of a holder in due course It follows from the statutory definition that the payee is not a holder in due course because there has been no negotiation It also follows that the transferee of a not negotiable cheque cannot be a holder in due course  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

HOW NEGOTIABILITY WORKS Example 1 Georgie sells $2,000 of goods to Clem, who pays by bearer cheque. The goods are defective in quality and Clem stops payment on the cheque. Georgie can sue on the unpaid cheque or on the contract of sale but Clem can raise defences – ie that the goods were defective and that was the reason for non-payment.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

HOW NEGOTIABILITY WORKS Example 2 Suppose, however, that Georgie had used Clem’s cheque ($2,000) to purchase a computer from Dianne and simply handed over the cheque to Dianne in payment. By writing and signing the cheque, Clem has promised that any lawful holders in due course will be paid and that includes Dianne. If Clem stops payment, Dianne can sue him for the value of the cheque. Clem cannot argue the defective quality of the goods that he bought from Georgie. If Georgie did not sign the cheque he cannot be liable to Dianne.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

LIABILITIES OF PARTIES TO A CHEQUE A person cannot be liable on a cheque without signature as either a drawer or an indorser. The signature may be of that person or of that person’s authorised agent. A signer to a cheque is not only liable to the immediate payee or indorsee; signing a cheque can establish a chain of liabilities that extends to, and is in favour of, persons not known to the signer.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

LIABILITY OF DRAWER The drawer of a cheque, by signing it, promises the payee, and all subsequent holders, that the cheque will be paid according to its tenor on presentation (as it was when signed, without material alteration).  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

LIABILITY OF INDORSER The indorser of a cheque, by indorsing it, promises the indorsee, and all subsequent holders, that the cheque will be paid according to its tenor on presentation. The indorser also warrants the validity of the cheque and the genuineness of preceding signatures. A forged signature is not a signature at all.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

EXAMPLE OF LIABILITY (1) Georgie draws a cheque payable to Clem or order. Clem indorses the cheque to Catya, who in turn indorses the cheque to Pauline If the cheque is not paid on presentation, Pauline can sue: –Georgie or –Clem or –Catya They are all signatories and liable to Pauline as holder in due course. If Pauline chooses to recover from Catya, Catya can in turn recover from Clem or Georgie.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

EXAMPLE OF LIABILITY (2) Georgie draws a cheque payable to Clem or order. A thief steals the cheque and negotiates it to Catya for value by forging Clem’s signature as indorser. Catya indorses the cheque to Pauline. If the cheque is not paid, Pauline can recover from Catya because Catya has indorsed the cheque (or from the thief, if they can be found). Pauline cannot recover from Clem because Clem has not signed the cheque. Pauline cannot recover from Georgie because the forgery occurred after Georgie signed the cheque. This broke the chain of liability.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

EXAMPLE OF LIABILITY (3) Georgie draws a cheque for $100 payable to Clem or order. Clem alters the amount to $1,000 and indorses it to Catya, who indorses it to Pauline. If the cheque is not paid, Pauline has no rights against Georgie; material alteration has discharged Georgie’s liability. Pauline can, however, sue Clem or Catya because their promises related to a cheque for $1,000.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

EXAMPLE OF LIABILITY (4) Joan forges Georgie’s signature on a cheque made payable to Clem or order and gives it to Clem in payment for goods. Clem indorses the cheque to Catya, who indorses it to Pauline. If Georgie stopped payment of the cheque then Clem and Catya are both liable to Pauline because they have both signed the cheque (promised that the cheque will be paid and that the drawer’s signature is genuine). Even though Georgie has stopped the cheque she is not liable to Clem, Catya or Pauline because she did not sign the cheque (her signature was forged).  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

THE DUTIES OF A CUSTOMER TO THE PAYING BANK To advise forgeries To draw cheques carefully The wider duty of the customer  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

TO ADVISE OF FORGERIES The customer has a duty to advise the bank of any known forgeries or suspicious transactions Failure to comply with this duty may raise an estoppel in the bank’s favour: Greenwood v Martins Bank  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

DUTY TO DRAW CHEQUES CAREFULLY See, for example, Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

THE WIDER DUTY OF THE CUSTOMER Despite attempts by banks to extend the duty of care of the customer, the courts have held that: –there is no obligation to check bank statements: Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd –there is no absolute duty to take care of cheque books: Westpac Banking Corporation Ltd v Metlej. The bank can impose additional duties on the customer by contract.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition

WHO IS THE TRUE OWNER OF A CHEQUE? This will always depend upon the circumstances but: –The payee of an order cheque remains the true owner unless he or she indorses the cheque to another party. The indorsee then becomes the true owner of the cheque. –The holder of a bearer cheque who acquired that cheque lawfully is the true owner.  2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint  slides to accompany A Guide to Business Law, 19 th Edition