Commercial Law

Negotiable Instruments

Mann “Essentials of Business Law”

pp 829 – 833 & pp 838 - 848

Commercial Law

Payment Of ChequeA cheque is either payable To order - requires drawee to pay to or to order

of a person specified (s. 21) or To bearer

can be paid to whoever holds the cheque this is the default position if not payable to

order (s. 22) Only 2 choices!

Commercial Law

Converting from Order to Bearer (s23)A cheque may be converted from payable to bearer to payable to orderWhere the only, or last , indorsement of a cheque

requires the drawee institution to pay to bearer, the holder may, convert the cheque into a

cheque payable to order by changing the indorsement.

Commercial Law

Account Payee Only A direction to pay only to the bank account of the

payee named on the cheque Has no legal status under Cheques Act Operates as a cheque payable to order Puts collecting bank on notice to make further

enquiries before paying someone other than named payee

Commercial Law

Signature You must have signed a cheque, either as

drawer or indorsee, to be liable on it (s31)

Commercial Law

Unauthorised Signatures (s32) Where any signature is placed on a cheque

without authority then it is inoperative unless The person against whom the signature is

being asserted is estopped from denying its genuineness

It has been ratified by the alleged signatory But it operates as a valid signature in favour of

any person who takes the check bona fide for value and without notice of the defect

Commercial Law

Holder in Due Course (s3) A person is a holder in due course if

the cheque was transferred by negotiation to the holder and,

at the time when the holder took the cheque, it was; Complete and regular on the face of it Not a stale cheque; and Not crossed “not negotiable”.

And took the cheque in good faith, for value and without notice of defect in title

Commercial Law

Stale Cheques (s3(5)) A cheque becomes stale after 15 months Banks have option to pay stale cheques Customer has right to tell banks not to pay stale

cheques

Commercial Law

Holder in Due Course (s3) (cont.) The holder took the cheque:

In good faith; For value; and Without notice of any:

dishonour of the cheque; or defect in, or lack of, title of the person

who transferred the cheque to the holder

Commercial Law

Holder in Due Course (s3) (cont.) The holder is deemed to have taken a cheque

with notice of defect in title if he had notice that the cheque was transferred to him

In breach of faith; or In fraudulent circumstances

Commercial Law

Holder In Due Course Person to whom a cheque has been negotiated Person has taken cheque

in good faith for value and without notice of defect

Cheque is regular on the face of it not stale Not crossed “not negotiable”

Commercial Law

Negotiation Normally, a person cannot get a better title to

goods than the title of the person who transferred it to him (the “Nemo Dat” Rule)

Negotiable instruments are an exception Person who holds a negotiable instrument

obtains good title to it even if they have unknowingly dealt with someone who is not the rightful owner

Commercial Law

Cheque Crossings (s 53) Required

2 parallel transverse lines; or 2 parallel transverse lines with the words not

negotiable between, or substantially between, the lines

Just putting the words not negotiable is NOT ENOUGH

Commercial Law

Effect Of Crossing A Cheque A direction by drawer to drawee not to pay the

cheque otherwise than to a financial institution (s54)

Where a cheque that bears a crossing and is transferred by negotiation to a person, the person does not receive a better title to the cheque than the title of the person from whom he took the cheque (s55).

Commercial Law

Effect of crossing a cheque Cheque cannot be cashed Acts as a safeguard against fraud Makes the cheque easier to trace A crossing may be added to a cheque by

drawer or any body else in possession of cheque

Commercial Law

Effect of crossing a cheque If bank pays out cash on a not negotiable

cheque then bank then bank has converted the cheque and must account to true owner of cheque for his loss

If person wrongfully obtains not negotiable cheque and then transfers it, then transferee has converted the cheque and must account to true owner of cheque for his loss

Cary v Rural Bank of NSW (Mann 844) Radford v Ferguson (1947) 50 WALR 14

Commercial Law

Radford v Ferguson (1947) 50 WALR 14 Plaintiff contracted with Johnson to build a

house Johnson not a registered builder Plaintiff drew cheque and crossed it “Not

Negotiable” Gave cheque to Johnson Johnson cashed cheque with third party Third party paid cheque paid to bank who

honoured it Plaintiff’s account debited

Commercial Law

Radford v Ferguson (1947) 50 WALR 14Decision Cheque obtained by false pretences Cheque voidable at option of plaintiff Johnson did have good title to cheque Third party did not get good title to cheque Third party had to pay plaintiff value of cheque

Commercial Law

Effect of crossing a cheque A collecting bank honouring a “not negotiable”

cheque gets no better title than the person presenting it to them

This means they could be liable in conversion to the true owner of the cheque

Commercial Law

Effect of crossing a cheque But Bank that honours cheque

in good faith without notice of defect Without negligence

Is protected (s 95) So bank that credits not negotiable cheque to

customer’s account cannot be sued

Commercial Law

Bank Cheques Do not comply with s. 10 definition. Is not drawn by one person on another Drawn by a financial institution on itself s. 5 clarifies and excludes operation of certain

sections with respect to bank cheques.

Commercial Law

Bank Cheques (cont.) Bank has no duty to warn public if cheques stolen No duty to prevent use by unauthorised persons. Not negotiable crossing means holder is not holder in

due course. This means holder can obtain no better title than person

from whom he took cheque Can be met with defence of total failure of consideration However may be misleading and deceptive conduct

Commercial Law

Bank Cheques (cont.) ABA Guidelines for dishonour of bank cheques

Forged or counterfeit instruments Bank cheques materially altered Bank cheques reported lost or stolen Failure of consideration for the issue of a bank

cheque Court order restraining payment

Still situations where they will be dishonoured.

Commercial Law

Raper V. Commonwealth Trading BankOf Australia (1975) 2 NSWLR 227 Jacobsen possessed a bank cheque drawn on

US Bank Wife used it to open account for them with CTB 12 days later obtained bank cheque in favour

Sidney Raper PL Used ank cheque to obtain goods from Raper US Bank Cheque dishonoured So, Commonwealth Bank dishonoured its bank

cheque

Commercial Law

RAPER V. COMMONWEALTH TRADING BANK

OF AUSTRALIA (1975) 2 NSWLR 227

Decision No value given by Raper to bank for cheque.

Total failure of consideration Credit in account conditional on clearance of

US Bank cheque Bank cheque not equivalent to cash

Commercial Law

Lyritzis and Lyritzis v. Westpac BankingCorporation No SG54 of 1992 FED No 812/94 Lyritzis opal miners and dealers in Coober Pedy Mr Lyritzis accepted 4 bank cheques drawn on ANZ from

interstate buyer unknown to him Before transaction Westpac Bank Manager told him that

a bank cheque was “as good as cash” and acceptable to any bank as a good and valid order for payment and failed to advise him that there were circumstances in which a bank cheque could be dishonoured

The bank cheques had been stolen Interstate buyer disappeared with the opals

Commercial Law

Lyritzis and Lyritzis v. Westpac BankingCorporation No SG54 of 1992 FED No 812/94Federal Court: Advice was misleading and deceptive due to

failure to warn of possibility of dishonour (s52 TPA)

A case where s. 52 TPA conduct may be constituted by silence

Negligence because duty to exercise reasonable care and skill when advising customer.

Commercial Law

Defects in Title Where a person obtains a cheque by

fraud duress other unlawful means

they do not get title to it (s3(3)) This does not limit the circumstances in which

they do not get title (s3(4))

Commercial Law

Defects in Title However, where a person lacks capacity or

power to incur a liability issues a cheque the cheque is still valid (s 30(3))

Commercial Law

COMMERCIAL BANK OF AUSTRALIA VYOUNIS (1979) 1NSWLR 444 Hallitt Bros owed Younis money Thought it was $3,000 and gave him a cheque Discovered more like $2,000 Cancelled the $3,000 and gave him a new

cheque for $2,000 Younis presented both and both paid by bank Bank could not collect from drawer

Commercial Law

COMMERCIAL BANK OF AUSTRALIA VYOUNIS (1979) 1NSWLR 444 Hallitt Bros owed Younis money Thought it was $3,000 and gave him a cheque Discovered more like $2,000 Cancelled the $3,000 and gave him a new

cheque for $2,000 Younis presented both and both paid by bank Bank could not collect from drawer

Commercial Law

COMMERCIAL BANK OF AUSTRALIA VYOUNIS (1979) 1NSWLR 444Decision Bank was entitled to recover money paid under

mistake of fact Unjust enrichment for Y to keep the money Note that it might have been different if Y had

changed his circumstances in reliance on money as this is a defence to a claim for return of money paid under a mistake of fact

Commercial Law

Drawing Bank’s Duty to Customer Pay any cheque presented for payment if there

are sufficient funds Will be liable for defamation if it doesn’t

Pay only in accordance with instructions given by drawer

Not to pay if cheque materially altered or signature forged Will be protected if pays in good faith and

without negligence

Commercial Law

Drawing Bank’s DutiesThe bank is not to honour a cheque if Countermanded (i.e. stop payment) (s90(1)(a)) It has notice of

Drawer’s mental incapacity (s90(1)(c)) Drawer’s death (s90(1)(c)) Drawer being an undischarged bankrupt (ss

125 and 126 of Bankruptcy Act )

Commercial Law

Drawing Bank’s LiabilityDrawing bank that honours cheque in good faith without notice of defect Without negligence

is protected (s 94)

Commercial Law

Customer’s Duty to Bank Inform bank if it becomes aware of forged

signature Write cheques carefully so as to reduce forgery Greenwood v Martins Bank (mann p 843) Commonwealth Trading Bank v Sydney Wide

Stores (Mann p 843)