Cheques

Nature

A cheque is a bill of exchange drawn on a bank payable on demand.  The provisions of the Bills of Exchange legislation apply generally to cheques.  See the separate chapters in relation to the principles applicable.

A cheque is fundamentally a direction to pay rather than an instrument that is intended to be postponed, negotiated, or discounted. Unlike other bills, it is not accepted and later paid.  The cheque must be paid or dishonoured on presentation to the bank

Special considerations apply to a cheque.  The customer has a relationship with his bank creating obligations for the bank to him.  Similarly, he undertakes obligations to the bank under that relationship.

Because of the enormous volume of cheque payments in former times, legislation was necessary to reduce legal risks and protect bankers.  This legislation relieves the more onerous responsibilities which would apply and which are not practically possible to observe, consistent with an efficient cheque clearing system.

In theory, a cheque can be in any form.  In practice banks issue cheque books with pre-printed forms, numbers and magnetic characters together with sort codes and account details.  They may contain pre-printed crossings.The cheque must be completed and signed by the drawer/customer.

Endorsement

The cheque is payable to a named payee or his order.  “Or order” may be printed on the cheque.  The cheque may therefore be endorsed.  In practice, the vast majority of cheques are simply presented to the drawer’s bank.

Cheques may be endorsed to the holder’s bank to facilitate collection.  In practice, banks collect cheques without endorsement by the named payee.

The cheque may be endorsed by the drawer.  An unauthorised endorsement is material alteration of the cheque which may avoid it as against certain party.

The addition of the words “not negotiable” does not affect the cheques transferability.  However, the person transferring it cannot give a better title than he has.  If that person is himself a holder in due course, the transferee will obtain that significant protection in effect.

Crossing

Crossing is an instruction on the cheque.  Two parallel lines constituted a general crossing.  It requires that the bank cheque be paid to a bank.  In a special crossing, the name of the payee bank to which payment should be made is inserted between the parallel lines.

A banker to whom the cheque is specially crossed makes specifically specially crossed it to another bank for collection.  Banker to whom an uncrossed or generally crossed cheque is sent may cross especially to itself.  The drawer may uncross a crossed cheque, but no others may do so.

If the banker on whom the cheque is drawn pays it in breach of the crossing, he is liable for the true owner of the cheque for any loss it may arise.  The crossing does not affect the negotiability of the cheque.  The holder who presents the cheque in person and not through a bank is not entitled to payment.  However, if payment is made the cheque is discharged.

 

The account payee or account payee only crossings are not provided for by law.  But in practice, they are interpreted as directions to the collecting bank to ensure that it is paid to the account of the payee only and not an endorsee. The practical effect is that the cheque is not negotiable unless the bank is satisfied after enquiry that the endorsement is in order.

An endorser who holds an uncrossed cheque may endorse the cheque.  He may make it more restrictive, but not less restrictive.  Therefore, the holder of an uncrossed cheque may cross it.  The holder of a cheque cross generally may cross it especially and the holder of a crossed cheque may insert the words non-negotiable.

Clearing

Banks operate a central cheque clearing system.  See the separate chapter on the bank clearing system in the Republic of Ireland.  The system is operated by a company of which the clearing banks are members.

The clearing banks process their own instruments and also act as agents for other banks who are not members of the system in some cases. The operation of the system is more complex where the payer and payee bank are different.

When the payee lodges the cheque to his branch, it will usually provisionally credit his account.  The bank then passes the cheque centrally to the bank’s clearing sector.  Cheques are netted out in the clearing centre at the end of each day. The cheque balances become part of the bank’s net financial position at the central bank.

The payee’s cheque is sent by the paying bank’s clearing office to its branch where it is drawn.  If honoured and not cancelled, the drawer’s account debited and the credit to the payee’s account becomes unconditional.  If it is dishonoured, it is returned to the branch of the collecting bank and the provisional crediting of the payee’s account will be reversed.In modern times the cheques are physically retained and electronic details of the cheque are forwarded.

Collection

The paying bank’s obligations are to its customers.  It has no contractual relationship with the payee.  It does not hold the drawer’s funds in trust for the payee.  It must follow an instruction to dishonour the cheque even if this is unjustified.

The drawee bank is bound to the collecting bank to honour the cheque

• once it is represented to the collecting bank that the cheque will be met
• after the presentation of the cheque, the paying branch informs that the cheque is being paid
• if the cheque is included in the daily settlement list or
• if the paying bank fails to return the cheque marked with a reason for not paying within the time allowed by the clearing rules.

There are tight timeframes for notification of non-payment.

In the first case above, the paying bank may debit its customer’s account where the drawer authorises the bank to give the authority or assurance.  Otherwise, if it debits the account it would carry the loss on countermand.  In other cases, the paying bank may debit the bank account and it is too late to countermand.

Where cheques are paid to another payee in another branch, each branch acts as if it were a separate bank.  The payee’s branch receives the cheque or collection from the drawer’s branch.  It is deemed paid if not returned within the time limits allowed for in the Bill of Exchange act which is short.

Where a bank collects the cheque, it is said to collect the funds for the customer.  However, as with accounts generally, the money received is not held on trust for the customers.  In accordance with general principles, bank accounts simply constitute a debt.  The bank does not hold the monies in it as trustee or even bailee for the customer.

Ultimately the collecting bank becomes the lender of the monies concerned on collection.  It credits the customer’s account and thereby increases its indebtedness to the customer.

The bank acts as the customer’s agent in paying cheques.  It must act in accordance with the terms of the mandate.  It must take reasonable care to ensure that it does not make an improper payment.

In paying accordance with the mandate, the bank reduces its obligations to the customer.If the bank pays in breach of the mandate it must compensate the customer for failure to perform its obligations with due care.

Where a bank collects a cheque, it does so as the agent of the customer.Wwhere the cheque is assigned to the bank it may take it as holder fro value and collect it on its own behalf.

The Collecting Bank

Where the bank collects on behalf of its customer it has a right to indemnity from its customer if it incurs a loss.  It is an agent for its principal.  It may have recourse under the terms of its contract for the account.

If the bank does not collect for the true owner, it may incur liability albeit with a right of indemnity from the customer.  Certain defences mentioned below may be available.

Where a bank receives proceeds as an agent where its customer pays in a good faith without notice of a claim, the bank is not liable for monies it hasn’t received.  Outside this principle, it must rely on the defences in the Cheques act.

A  collecting bank does not become a holder for value by crediting the customer’s account.  This is not a payment by the bank but is a provisional arrangement.  Where, however, the bank gives value by way of cashing a cheque or permitting the customers to draw against uncleared cheques under an express arrangement or implied one, it may be held to be a holder in value.

The collecting bank has a duty to its customer and the paying banker and the owner of the cheque.  It is obliged to its own customer to collect the cheque promptly and diligently.  The holder of the cheque is obliged to present within a reasonable time of issue or endorsement.

Where a cheque is dishonoured the collecting banker must give notice to the parties liable or its customer requiring it to give notice of dishonour.  There is no obligation to give notice of dishonour when the non-payment is due to insufficiency of funds or countermand.  This is by far the most common grounds for non-payment.

Where the collecting banker collects on a forged cheque, the paying banker may collect on  restitutionary basis.  However it may be prevented from recovering where the forgery was detectible or the bank should have been put on notice  where it has represented the cheque as genuine.  It will not be entitled to recover if the collecting bank has paid out the monies to its customer (as is principle before discovery) unable to recover from the collecting bank under agency principle.

The collecting bank runs a  risk of liability by collecting a cheque for the wrong party due to forgery of the drawer’s signature or by other fraud. Where the collecting bank receives a cheque from the third party who has no title, this is a conversion in itself for  which the bank may be liable.

Statutory Protections

The Bill of Exchange act and the Cheques Act protect collecting banks from liability. It protects against the claim by a person with a better title to the cheque or the drawer. Such a person would have an action for monies had and received if proceeds are misapplied.

The defence provides that where a banker in good faith without negligence receives payment on an instrument, (including a cheque or draft) and having  credited the customer’s account with the amount received for payment for itself where the customer has no title or defective title to the instrument, the bank does not incur liability to the true owner by reason only having received payment.

The banker is not to be treated as having been negligent only by failure to consider the absence or regularity of ndorsement of an instrument.  The protection is retained even though the cheques are marked account payee or non-transferable provided it exercise reasonable care in collecting for the third party payee.

The bank is expected to exercise care and prudence in accordance with normal practice.  Negligence may occur when opening an account or when there is a failure to take care that the person concerned was entitled to possession of the cheque.

The duty is looked at from the perspective of the banker’s relation with its customer rather than the third party owner. For example, if a cheque is collected for a person about which the bank has no previous information, it would be obliged to establish identity.  In any event, money laundering requirements enacted in the last 30 years created substantial obligations to identify the customer.

Where the customer is collecting for a third party without a bank account, the duty of the bank must take steps to satisfy itself with the collection as authorised by the third party. Provided the explanation is reasonable, the bank fulfils its duty.

The bank is not obliged to require the customer’s endorsement if the customer is the payee or endorsee.  If the customer is not the payee, the banker must examine the endorsements to the payee.  It must vouch special endorsements.

Even where the customer is payee, the circumstances may put it on notice of suspicious circumstances.  Where an employee has drawn large cheques on his employee, they may just not need to put the bank under inquiry.  Where the sums are out of the normal, the bank may be negligent for not taking steps to vouch them.  The common feature is that the suspicious circumstances applies to the customer.

The receipt must be on behalf of a customer with whom the bank has an account.Where the section applies, the bank does not incur liability to the true owner by reason of only having paid it.  It protects the bank from restitution and conversion claim.

It does not, however, give the bank or its customer title to the proceeds.  It enables the bank to receive the proceeds on behalf of its customer without being liable.  The bank must account if the bank gives value it is protected after receipts.  See above where it may give value by crediting a customer.  If the bank is not given value and it receives notice, it must account to the true owner.  If it fails to do it, it may be liable for restitution.

The paying banker owes duty to comply with its customer’s mandate.  It must exercise reasonable skill and care in accordance with normal banking practice.  In the context of cheque payment, it is obliged to pay the cheque to the proper payee or endorsee and not to a third party.

The paying bank is obliged to honour the customer’s cheques provided that the accounts is in credit and the cheques are properly drawn.  Similarly, if there is an overdraft facility, the bank must honour cheques within it.  If the bank does not comply with its duty, it will be liable for breach of contract and may have to pay compensation.  It may be liable for defamation where the non-payment adversely reflects on the customer’s reputation.

It is not necessary followed that a dishonour is defamatory.  Where there is an error in the cheque or an regular endorsement, there would be no liability.  However, the reverted drawer implies countermand or insufficiency of funds.

The obligation to obey request for countermand applies irrespective of whether the countermand is justified.  The bank is entitled to confirm its instruction to vouch that is in what is required and that it is ordered by the customer.  A payment after countermanding is in breach of the mandate, however, where it discharge the payment, the bank will be subrogated to the payee.

The paying bank is obliged to pay cheques in accordance with a genuine or authorised signature.  This is a strict duty and if the cheques is forged it is not charge to the payee’s account.  It is not a question of the bank’s being obliged to use reasonable care only.

Where there is a mandate by a company or by partnerships authorising certain persons to pay, the bank must only pay in accordance with the mandate.  This may require two signatures.

• There is statutory provision for protection of a paying bank who pays against the forged or unauthorised endorsement.  However this does not apply in the case of a forged cheque.  However the customer will not be able to deny the forged cheque under certain circumstances.
• Where he draws the cheque in such a way as to facilitate forgery or fraud such as by leaving particulars blank.
• Similarly where he discovers the forgery but does not inform the bank.
• Where he holds out another as  having an authority to draw cheques in a manner or for purpose which would usually be regarded as authorised or usual.

Beyond this the customer does not have any wider obligation to take precautions so as to prevent fraud or forgery.  He need not cheque his bank statements, but when he becomes aware as above, he must tell the bank promptly.

The Cheque Act removes the necessity for the cheque to be endorsed to the bank.  Where a bank pays a cheque or other bill in good faith in the ordinary course of his business, it is not obliged to show that the endorsement of the payee or subsequent endorser was made under the authority of the person whose endorsement reports to be.

The  payment is good and deemed in due course although the endorsement has been forged or made without authority, the bank is entitled to receive only signature are genuine and authorised, but it must pay the bill in good faith in the ordinary course of business.  Even if it is negligent regarding the signatures, it is protected.  The provision does not apply where there are no endorsements or there are irregular endorsements.

Where a paying banker pays a crossed cheque in good faith and without negligent to a banker (in the case of general crossing) or the banker doesn’t been specially crossed or his agent, the banker and the drawer are entitled to the same rights and deemed to be in the same position as if payment was made to the true owners.

The Cheques Act applies to irregular and absent endorsement.  It provides where a banker in good faith and in the ordinary course of business pays a cheque which is not endorsed or is irregularly endorsed, he does not incur liability by reason only of such irregularity or absence and is deemed to have paid it in due course.  As above, it is enough that the banks acts in good faith and it is not necessary to prove the absence of negligence.

An irregularity might be a nonmatching of name or similar discrepancy.

The paying bank must have paid cheque to the payee or other endorsee.  The requirements of crossing must be met.  T

The bank is not entitled to follow its mandate blindly if there are very good reasons for believing the actions are unlawful.  For example if an authorised employee draws cheques on themselves which are highly unusual, the company may be entitled to recover money.  Similarly if an unlawful transaction takes place which is patent to the bank, the true owner may be entitled  to recover money.

The above propositions follows in the bank’s general duty to exercise skill and care.  Although persons may be presumed to be honest, where unusual transactions takes place, the duty to enquire may arise.  The failure to enquire may leave the bank liable.

Death  or insolvency of customer.

The banks mandate to pay is terminated by notice of the customer’s debt.  The debt of itself does not affect the termination.

Where a customer becomes bankrupt or insolvent, payments made after presentation of the petition may be void.  The insolvency legislation protects the bank making payments in good faith without notice of the petition.

In a corporate bankruptcy, payments may be authorised by the court and this may be necessary.

The paying bank owes duty to the true owner of the cheque.  Breach of this obligation may lead to liability for conversion.

Where a bank pays a cheque to a person not entitled, it may be liable to the true owner for the value of the cheque.  However, where there has not been unjust enrichment as a result of the payment such as where the payment discharge an obligation of the drawer to the party paid, then the bank will be subrogated to the third party’s rights against the drawer.  If the payment is ineffective and the third party has not changed his position in reliance with the payment or acted in bad faith, the bank is entitled to recover the money paid as a mistake of fact.

Where bank pays money by mistake to its customer, it is generally entitled to recover the sum back.  However, if the customer was misled by the error or has changed its position in reliance that it would be inequitable to require full payment.  The bank may not be able to recover payment.

Where a banks pays under forgery, it may recover from the payee on this basis.  It may recover from the collecting bank, if it does not parted with the money.

If a bank pays in a countermand cheque, it may be entitled to recover money where the money is not due.  If the money is still owed, the bank may still be entitled to recover.  This proposition however appears questionable as the third party would be not aware of the — if the third party is not aware of the countermand.