Negotiable Instruments 1: Bills of Exchange 405
Measure of Damages
In the event of a bill being dishonoured, the holders and, in turn, every other party to the bill who is compelled to pay it, may recover from any preceding party liable:
The amount of the bill.
Interest by way of damages, such interest to be calculated from the date of presentment for payment if the bill is payable on demand, and from the date of maturity of the bill in any other case.
The expenses of noting (and if necessary) protesting the bill.
L. INCOMPLETE BILLS AND ALTERATIONS
Incomplete (Inchoate) Bills
It is possible for a bill to be drawn incomplete, leaving the holder to fill in the amount payable.
So long as he/she does so within the terms agreed, there is no problem, but the holder may fraudulently complete the bill by inserting an excessive amount. In such a case, the holder will not be able to enforce the bill in any amount against anyone who became a party to it prior to its completion, except that if the bill is negotiated to a holder in due course after completion he/she can enforce the bill in the full amount shown against any prior party (S.20).
A blank, stamped piece of paper may be signed and given to someone for it to be completed as a bill. So long as the intention is there, the holder can fill in all the particulars of the complete bill and the position is as described above.
Where a bill expressed to be payable a fixed period after date is issued undated, or where the acceptance of a bill payable a fixed period after sight is undated, the bill is similarly incomplete. The bill is not, however, invalid and the holder has authority to insert the true date of issue or acceptance him-/herself.
Where the sum payable is expressed both in words and in figures and there is a discrepancy between the two, the sum denoted by the words is the amount payable.
An incomplete bill may be transferred from one person to another, but no person taking the bill in this form can be a holder in due course. A bill that has not yet been accepted, however, is not an incomplete bill within this context.
Altered Bills
When a bill is materially altered, all prior parties are at once discharged from any liability whatsoever on the bill (even the original amount) unless they assent to the alteration. However, exception is made where the alteration is not apparent on the face of it and the bill is in the hands of a holder in due course, who may enforce it against those persons who became parties to the bill before the alteration, according to the original tenor of the bill (S.64).
An example of this would be where a bill is altered in a non-apparent manner from £50 to £500 and then comes into the hands of a holder in due course; the latter would be able to enforce payment of the original amount of £50.
Persons who become parties to the bill after the alteration will be liable for the full amount of the bill.
The Act lists the following alterations as material: alteration of the date, the sum payable, the time of payment, the place of payment; and, where a bill has been accepted generally, the addition of a place of payment without the acceptor's assent.
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Note the following cases.
Koch v. Dicks (1933): The defendant accepted seven bills of exchange purported to be drawn in London and which, when handed to the drawers, were complete inland bills. The payee endorsed the bills to the claimant, who converted them into foreign bills by altering the place where they were drawn from "London" to "Deisslingen". The alteration was made without the defendant's knowledge or consent. It was held that the defendant was not liable on the bills as the alteration was material and the bills were void under S.64 of the Act.
Gerrard v. Lewis (1883): This case concerns a signed acceptance with the amount not filled in the body of the bill, but with the following figures in the margin: £14. 0s. 6d. The bill was handed to the drawer in that state. The drawer, having filled up the bill for £164. 0s. 6d. fraudulently altered the figures in the margin to that sum. The bill was endorsed over to the claimant. It was held that the defendant was liable for the larger amount as the marginal figures were not a material part of the bill and as the person entrusted with such acceptance in blank had authority to fill in the bill as he pleased, within the limits of the stamp. This was, therefore, an instance of fraudulent completion.
Hong Kong and Shanghai Banking Corporation v. Lo See Shi (1928): It was held that where the erasure of the number of a bank note is due to accidental mutilation there is no material alteration sufficient to void the bill.
Lost Bills
The Act states:
"Where a bill has been lost before it is overdue, the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again.
If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so" (S.69).
As it is possible that the lost bill may get into the hands of some person who takes it innocently, it is possible under certain circumstances for the drawer to be called upon to pay both the original and the duplicate instrument. He should, therefore, satisfy himself before he issues a duplicate that the original is in fact lost or destroyed and, in addition, ensure that adequate security is granted to him against the eventuality.
Overdue Bills
We have already discussed overdue bills, but it may be convenient to summarise the position here.
A bill must be presented for payment before it is overdue, or the drawer and all prior endorsers will be discharged from liability. The acceptor, however, remains liable, as too does any person who puts his/her name to the bill after the date of maturity.
No person taking a bill after its date of maturity can be a holder in due course, and any such person will take the bill subject to any defects of title affecting the bill at its maturity. If, however, there is a holder in due course who puts his/her name to the bill before maturity, all defects of title that arose prior to his entry on the bill remain inoperative.
A bill is overdue:
In the case of a bill payable "on demand", when it has been in circulation for more than a reasonable length of time. What is a reasonable time is a question of fact to be determined in each case.
©ABE and RRC
Negotiable Instruments 1: Bills of Exchange 407
In the case of a bill payable on a fixed or determinable future date, prima facie on that date. Prior to the coming into force of the Banking and Financial Dealings Act 1972, three "days of grace" used to be added to the due date. However, this Act, which redefined the days of Bank Holidays, stated that all bills due for payment on a Bank Holiday shall be deemed to be complied with if paid on the following day, provided that it is not a Saturday, Sunday, or a Bank Holiday. This had the effect of abolishing days of grace.
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410 Negotiable Instruments 2: Cheques
Liability of Maker |
423 |
Joint Notes |
423 |
Joint and Several Notes |
423 |
Application of Bills of Exchange Act 1882 |
423 |
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Negotiable Instruments 2: Cheques 411
A. INTRODUCTION
In this study unit we will be considering the law relating to cheques. Remember that a cheque is merely one form of negotiable instrument. It is being considered separately because there are special rules relating to banks and their customers. There are also slight differences which we must note between a cheque and a bill of exchange.
B. THE NATURE OF A CHEQUE
General Comparison with Bills of Exchange
The statutory law relating to cheques is mainly contained in the Bills of Exchange Act 1882 and the Cheques Act 1957.
Section 73, Bills of Exchange Act 1882, defines a cheque as:
"A bill of exchange drawn on a banker, payable on demand."
Note the two special requirements for a cheque:
It must be drawn on a banker.
It must be payable on demand.
Although cheques are a special type of bill of exchange, and the Bills of Exchange Act applies to cheques, there are a number of important points of difference:
(a)Because of the contractual relationship between banker and customer, there are a number of special obligations on these parties.
(b)The rules relating to acceptance do not apply to cheques; the banker on whom the cheque is drawn never "accepts" it, so that the drawer is the party primarily liable on the instrument.
(c)There are special provisions for the crossing of cheques which do not apply to ordinary bills of exchange.
(d)Special statutory protection is given to bankers in relation to forged endorsements.
It may be observed further that, in practice, cheques are rarely used in the way of bills of exchange as negotiable instruments. The vast majority of cheques are presented for payment by the person to whom they are initially given, and negotiation of a cheque is comparatively rare. In effect, cheques are generally used merely as a directive by the drawer to his/her bank to transfer money from an account to the account of the payee.
It may be convenient here to indicate diagrammatically the normal course of a cheque.
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Figure 18.1
If A draws a cheque in favour of B, B may either take it to A's bank and obtain payment (Figure 18.1), or he can pay it into his own bank who will, on his behalf, collect payment from A's bank (Figure 18.2). A's bank (the paying bank) will debit A's account as they meet the cheque and B's bank (the collecting bank) will credit B's account with the money collected.
Figure 18.2
Cheques and Receipts
In addition to the principal points of difference between cheques and bills of exchange referred to above (and to be considered in detail later), there are a number of other special features of cheques that may be noted here.
Prior to 1957, it was common practice for the payee of a cheque to endorse it on the back as he paid it into his bank for collection, and a cheque so endorsed was sufficient evidence of receipt of payment for the drawer of the cheque (to whom, of course, the paying bank would return the discharged cheque in due course). This practice was generally found rather tedious, and the Cheques Act 1957 contained various provisions to make it unnecessary, of
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which S.3 provides that "an unendorsed cheque which appears to have been paid by the banker on whom it is drawn is evidence of the receipt by the payee of the sum named in the cheque". Thus a paid cheque, whether or not endorsed by the payee (but not if endorsed in favour of some other person) will nowadays normally be adequate evidence of receipt of payment by the payee (for auditors, etc.), and the payer is unlikely to ask for any other receipt. However, if he/she does do so the payee is bound to provide it.
In this connection it may be noted that some cheques are found with a form of receipt attached, and require as a condition that the receipt must be duly completed before the cheque can be paid. Since such an instrument does not constitute "an unconditional order in writing", it is not strictly a cheque, and falls outside the Bills of Exchange Act; therefore bankers usually require an indemnity from customers using such instruments, in order to safeguard themselves.
Post-dated Cheques
The Bills of Exchange Act 1882 allows bills to be dated as at a date subsequent to that on which they are actually drawn. In the case of cheques such a practice should strictly invalidate the instruments as they cannot be said really to be payable on demand, but in fact such cheques are held to be valid as payable on demand as from the date entered.
Overdue Cheques
A bill payable on demand must be presented for payment within a reasonable time of the bill's date and if this is not done the drawer and prior endorsers are discharged from liability. In the case of cheques, however, the drawer cannot escape liability in this way (though any endorser will), and will remain liable on the cheque for the normal limitation period of six years. In practice, a cheque presented more than six months after date will be returned as "stale", but the holder can obtain a fresh cheque from the drawer.
Where, however, the cheque has been held for more than a reasonable time and the drawer suffers actual loss through this delay, then the drawer will be discharged to the extent of such loss. This might arise where, after the cheque has been held for more than a reasonable time, the drawer's bank goes into liquidation and is only paying £0.25 in the £. Since the holder of the cheque is responsible for the drawer having the excess funds represented by the unpresented cheque in the bank at this time, he/she will be able to claim from the drawer only one-quarter of the value of the cheque and must him-/herself prove in the liquidation (i.e. seek funds owed as a proven creditor) for the balance.
C. BANKER/CUSTOMER RELATIONSHIP
The relationship between banker and customer is a contractual one whereby the customer deposits money with the bank on the understanding that the bank will meet cheques drawn by the customer on the account up to the amount of the balance standing therein or of any agreed overdraft.
Bank's Duties
The duties of the banker under this contract are two-sided: to honour cheques duly drawn up to the amount available, and not to pay without proper authority.
In Schioler v. Westminster Bank Ltd. (1970) it was also said that a bank owes a duty to credit a customer's account with dividends received on the customer's behalf and it owes a duty to take care in doing so.
The limitations on this duty are illustrated by United Overseas Bank v. Jiwani (1977) where the defendant had been informed by his bank that his balance amounted to 31,000 dollars
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when in fact it was 25,000 dollars. The defendant then ordered the bank (he claimed in good faith), to make a payment of 30,000 dollars to a third party, being the purchase price of a hotel sold by the third party. On being asked by the bank for repayment, the defendant claimed that he was protected by an estoppel arising from the bank's representation. The court refused this argument, pointing to the fact that there must be a reliance on the representation and a change in position such as to make it inequitable to order repayment. Satisfied that the defendant would have purchased the hotel in any event, borrowing a part of the purchase price if necessary, the court concluded that there was in this case no such change in position.
If the bank fails to meet a cheque that is duly drawn where there are funds available to meet it, it will be liable for damages to the drawer. Where the drawer is a trader, damages will be awarded without proof of actual loss, but in other cases loss must be established.
On the other hand, the bank will be liable if it pays a cheque on which the drawer's signature is forged, or if it pays a cheque not properly drawn (e.g. if a company's cheques require the signature of two directors and only one signature is present).
The bank will also be liable if it meets a cheque after the customer has countermanded payment. Note that where the countermand is received by telephone or telegram (so that the bank cannot verify the authority) the bank should return the cheque to the payee marked "payment countermanded by telephone – present again" and then obtain written confirmation from the customer. Such action will not amount to refusal to meet the cheque which would render the bank liable if the countermand was unauthorised. The bank's authority to meet cheques will also be terminated in the following circumstances:
Notice of the customer's death or insanity.
Notice of an act of bankruptcy by the customer or the making of a receiving order against the customer.
Receipt of a garnishee order (an order awarded to a judgment creditor which "freezes" the balance then standing in the customer's account).
The effect of computers upon this relationship between banker and customer is illustrated by the case of Momm v. Barclays Bank International (1976) in which it was decided that a bank transfer is effected when the bank accepts the instructions of a customer to credit another customer and the bank computer processes for doing so are set in motion. The fact that the entry can be later reversed has no bearing on the transaction.
Two companies banked at the same branch and transactions were computerised. Final balances on customers' accounts were not known until the date after, and transactions were reversed if a customer's indebtedness was unacceptable. One of the companies instructed the bank to transfer £120,000 on 25 June to the second company and on 26 June the computer process was set in motion. On the afternoon of 26 June, the company making the payment announced it was going into liquidation; on the following day its account was in debit and the bank reversed the entries. The company which should have received payment claimed the money from the bank. It was held that, as the bank could not accept countermanding instructions from the paying-in company once the computer process had been set in motion, the transfer was then completed. It was not essential that notice to the payee should be given.
Customer's Duties
The customer owes the bank a duty of care in the way a cheque is drawn. Where the amount of a cheque is altered and the cheque is met by the bank, the position will be as follows:
(a)If the alteration was apparent, the bank must bear the loss.
